The shift from school to academy status brings with it a raft of changes in how a school is legally and financially managed. The transition itself can be complex and, afterwards, there are new and perhaps unfamiliar procedures to be followed, such as fulfilling the requirements of the Department for Education Funding Agreement and the Statement of Recommended Practice (SORP) applicable to charity account preparation. In this post, we’ll look at some of the major areas that schools need to consider.
When a school becomes an academy, its legal status changes to that of a not-for-profit limited company and a charitable trust. As part of this change, the school’s board of governors is replaced by a board of trustees who have the same responsibilities as company directors and the trustees of a charity. While the people involved may stay the same and the job of governing a school is still to be done, the trustees are additionally required to comply with all the laws and regulations that pertain to the new status.
Under the TUPE Regulations, the terms and conditions of staff employment cannot be changed when a school becomes an academy. However, as the academy is a different legal entity, staff cease being employees of the former school and become employees of the new company. This means that from the date the academy comes in force, the payroll needs to be transferred over. If the academy uses a payroll provider, they will need to be notified in advance. The academy also has to ensure that procedures for handling pension contributions are complied with.
As an employer, an academy will need to register for PAYE and NI as soon as conversion takes place in order to pay their employees’ tax and National Insurance contributions. As far as corporation tax is concerned, the academy’s charitable status means it will be exempt. However, income from trade or the sale of property could be liable for tax. Just like local authorities, academies are able to reclaim VAT paid on non-business activities. If desired, they can register for VAT, though this would mean having to charge VAT for income generating activities. Alternatively, they can complete an input tax reclaim form.
As the academy is a different legal entity from the former school, it must open a new bank account using the academy name. Once this has been done, it can transfer balances from the former school into the new account. If the local authority holds any funds, these too can be transferred once the parties have agreed on a figure.
Keeping a record of assets is required for accounting purposes, so it is important for new academies to create a register of all assets transferred from the former school. This is likely to be a long and arduous task considering the multitude of equipment used in schools. Transferred assets must be given an estimated market value. Besides assets which have been transferred, new acquisitions must also be recorded but done so at cost. As with all assets, depreciation needs to be applied to spread the cost over the financial years in which they are used.
Academies, like all registered companies, are required to submit annual returns to Companies House. In addition, they must also send them to the Education Funding Agency. Government rules stipulate that academies cannot set deficit budgets and that they must not have a deficit at the close of the financial year. In addition, academy trusts are prevented from taking out loans or borrowing money. To ensure that academies handle their finances correctly, the funding agency has been given Ofsted style powers and can serve a financial notice to improve if it deems that there are weaknesses in financial management.
Just like state schools, academies are allowed to generate additional income, such as from hiring out sports facilities. However, any income it does generate must be within the scope of the academy’s charitable objectives. Money raised from activities not within those objectives could be seen as trading income and, as such, could be liable for tax. For this reason, academies should seek the advice of an accounting specialist to ensure that its memorandum and articles are created in a way that reduces the risk of this happening.
Transparency and accountability
Academies have a duty to ensure that they are run in accordance with all laws and regulations they have to follow. As part of this, the Academies’ Financial Handbook requires them to appoint what is known as a Responsible Officer, a person who will assess the academy’s financial procedures and give an independent overview of areas such as procurement, integrity and governance. For transparency, the audited accounts have to be available on the academy’s website.
As you can see, there are considerable challenges to overcome when schools opt to become academies. Hopefully, the information given here will provide an overview of what is required. However, if you are considering academy status, it is important that you get the right professional help from the outset.
If you need specialist financial advice on becoming an academy, the Champion Education Team can provide the right solution for your needs.