Financial and Accounting Issues
FINANCIAL AND ACCOUNTING ISSUES TO BE ADDRESSED BY NEW ACADEMIES
Academy schools are Exempt Charities. As such, academies will have charitable status, but they will not be registered with the Charity Commission. This means that academies will need to comply with Charity Law for management and reporting purposes, but will not be required to submit accounts to the Charity Commission.
Academies are responsible for their own accounting systems. There is no requirement to employ a qualified accountant, as many school finance managers will be able to maintain the necessary records. However, finance managers may need to undertake specialist training for their new role. An experienced auditor will also be able to provide support and advice.
There are a number of specialist software packages which been developed for academies, but it is also possible to adapt standard accounting packages. The reporting facilities need to be reviewed to ensure that they provide accurate and meaningful reports for the day-to-day management of the school, and to meet the reporting requirements of the Education and Skills Funding Agency. Licences for some software used in schools e.g. SIMS FMS are licensed through the local education authority. This means that an academy can only continue to use the software if it is re-licensed for its use. Conversion will require a school to close one accounting period and open a new reporting period, even if the conversion takes place in the middle of an academic year. If an academy wishes to change its accounting software in the long term, the conversion date is the best opportunity to change so its complete financial history will be on one accounting system.
The academy will need to agree the value of reserves acquired from the local authority, to be entered in its accounting records from day one. Reserves transferred may include bank and cash balances, fixed assets, debtors and accrued expenses relating to the local authority school.
The local authority will be responsible for all payments up to the point of conversion, and the academy will be responsible for all payments after conversion. A school may be required to apportion costs which span the conversion period, e.g. payroll costs and statutory redundancy payments. Once the final reserves figures have been agreed, the balance will need to be transferred to the new academy’s bank account. This will need to be done in negotiation with the local authority and may simply be a transfer between the old and new school accounts. However, some local authorities may request all funds to be repaid to them and then pay the agreed balance to the new academy. In the event that a school has a deficiency of reserves on its conversion to an academy, arrangements will need to be made regarding the repayment of the deficit to the local authority.
An academy’s funding is provided directly by central government and is split between the General Annual Grant (GAG) and Capital and Earmarked Annual Grants. The academy is required to spend the funding it receives in accordance with the Funding Agreement. It may retain unspent funding, subject to the restrictions set out in the Funding Agreement and having a clear plan in place to use the surplus for the benefit of pupils.
Academies are eligible for a start-up grant of £25,000 as a contribution towards the cost of conversion. Conversion costs may include legal and professional services for the formation of the new company and the transfer of staff and changes to computer software licences.
The start-up grant is paid to the School before the conversion to an academy takes place. The school must keep a record of the start-up costs incurred which is submitted to the Department for Education. Any unspent funds can be carried forward to the bank account for the new academy.
New Bank Account
The school must open a new bank account, in the name of the new academy, to receive its funding. Funds from the predecessor school will be transferred to the academy bank account once the final reserves have been confirmed.
An academy is responsible for its own insurance from midnight on the day of conversion. Insurance cover is needed for land and property, business interruption and governing body and employer’s liability. Appropriate motor insurance may also be needed. At present a separate grant is received to cover the cost of insurance, however, a competitive quote should be obtained as there is no guarantee that this grant will continue in the future.
A Fixed Asset Register will need to be created, to record the value of assets transferred from the local authority school and subsequent additions. Assets transferred will be included at their estimated market value on the date of conversion and all additions will be at cost.
Fixed assets which have been capitalised in the accounts will need to be depreciated, to spread the cost over their remaining useful lives. Typical depreciation rates may be:
- Land – not depreciated
- Buildings – 2% per annum straight line (useful life 50 years)
- Computer and other equipment – 33% per annum straight line basis (useful life 3 years)
- Furniture and fittings – 10% per annum reducing balance (value estimated to reduce by 10% each year)
- Motor Vehicles – 25% per annum reducing balance (value estimated to reduce by 25% each year)
For control purposes, the school should have a full inventory of all assets (furniture, equipment etc). For accounting purposes, the asset register may only include assets over a minimum value, eg £1,000).
Teaching staff are members of the national Teachers’ Pension Scheme (TPS) and non-teaching staff are members of the Local Government Pension Scheme (LGPS). Both schemes are defined benefit pension schemes, otherwise known as final salary schemes, and academies are obliged to continue membership of both schemes.
Contributions paid to the Teachers’ Pension Scheme are included in the accounts as if they were payments to a defined contribution scheme. This is because the Teachers’ Pension Scheme is a national unfunded scheme, which is paid out of general taxation. An actuarial valuation is carried out every four years, but it is not possible to identify the proportion of assets or liabilities in the Teachers Pension Scheme that relate to an individual academy.
In contrast the LGPS is a funded scheme, which is administered locally. They use the services of an actuary to value the assets and liabilities of the scheme as a whole, and to split the balance between the various member organisations. Each academy will need to commission an actuarial valuation to assess the net assets or net liability attributable to the academy at the point of conversion and each subsequent year end. The information presented in the actuarial valuation will be included in the statutory accounts.
Some academies have experienced a significant increase in the contribution rates for the Local Government Pension Scheme. The Government is currently looking at ways in which the contribution rates can be pooled, thus ensuring a more consistent rate for academies.
Many schools have separate funds to manage the financial aspects of school trips. Some school funds are registered as individual charities with the Charity Commission and will, therefore, be under the control of the fund’s trustees and not under the control of the academy. School funds which continue to be run as separate charities will not be included in the statutory accounts. School funds which are under the control of the academy may be included in the statutory accounts, as a separate restricted fund, but the administration and accounting system may be kept entirely separate from the main accounting function.
Annual Statutory Accounts
Key points to consider
- Set timetable for preparation of year end accounts and audit work
- Agree dates for interim audit work (if applicable)
- Agree dates of meetings with trustees to discuss audit issues and approve accounts
Academies are currently required to prepare audited, statutory accounts for the period ended 31 August for submission to the Department of Education by 31 December of that year.
The accounts need to be filed at Companies House within nine months of the year end, i.e. by 31 May. Please note that different rules apply for the first accounting period, which in some cases could result in a shorter filing deadline.
In a Single Academy Trust there will be a single set of statutory accounts which reflect the activities of the School in a format suitable for filing with Companies House. In a Multi-Academy Trust there will be also be a single set of statutory accounts, but these will incorporate the activities of all member schools. Items of income and expenditure for each school will be aggregated in one Statement of Financial Activities, for presentation in the statutory accounts. Similarly, assets and liabilities of the various schools will be shown together in the Balance Sheet, but balances carried forward to the new financial year will be kept in separate, restricted funds for each School.
Academies no longer receive a VAT grant, but instead are able to reclaim VAT incurred on expenditure relating to the running the school through special provisions announced in May 2011. Guidance notes on the VAT Refund Scheme for Academies were issued in June 2011 as VAT Information Sheet 09/11. The information sheet can be found on the HM Revenue and Customs website at www.hmrc.gov.uk.
There are two options for reclaiming VAT on costs incurred in running the academy.
(i) The academy may apply to be VAT registered, submitting monthly or quarterly VAT returns to HM Revenue and Customs. As a VAT registered organisation, the academy must charge and account for output VAT on goods and services it supplies as well as reclaiming VAT incurred.
(ii) The Academy can apply for a refund of VAT on costs incurred for the running of the school. This is referred to as a Section 33 claim and limits the Academy to the recovery of VAT on purchases made wholly and exclusively for the provision of education. Section 33 claims can be submitted for a period covering one or more calendar months.
If academies choose to make a Section 33 claim, they will need to monitor potential VAT liabilities arising from their activities, as they must register for VAT if their taxable supplies exceed the VAT registration threshold. The various income streams should be listed, together with the estimated annual income, in order to assess the VAT implications for each source and for the academy as a whole. They will also need to monitor VAT incurred and only claim a proportion of VAT where the costs relate to both the academy and other activities such as lettings as only VAT relating to the academy can be reclaimed.
2. Pay As You Earn (PAYE)
Individual academies will need to register separate PAYE schemes in order to record and pay HM Revenue and Customs for the tax and national insurance deducted from staff pay.
Payroll processing may be carried out in-house or contracted to a payroll bureau.
3. Corporation Tax
As an exempt charity, an academy is not liable to corporation tax on the income received from central government. However, there may be a liability to corporation tax if the academy undertakes a significant level of trading activities in order to generate additional income.
4. Trading Activities
Activities used to generate income for the academy, such as the provision of catering services to other schools or the letting of school buildings, may be classed as trading activities by HM Revenue and Customs.
Charities can only receive trading income up to a maximum of £50,000 per annum. If income from trading activities will exceed this threshold, the Academy will need to set up a subsidiary company to manage the trading activities. The trading subsidiary would donate any profits generated to the charitable company, and would be able to claim corporation tax relief on these donations.