Related Party Transactions

Summer 2019

One of the central tenets of charity law is that individuals involved in running charities should do so for altruistic purposes and not for personal benefit.

While that concept is very noble, it overlooks the possibility that the very skills and business links that make an individual a good candidate to be a trustee or a member may also make them ideally placed to provide goods or services to the charity. Both the Charities Act 2011 and the standard Department for Education Articles of Association accept this point and allow for trustees and members (and those connected to them) to be paid for providing goods and/or services to academy trusts in very limited circumstances.

However, following some high-profile news stories relating to payments from academy trusts to connected parties, the Education and Skills Funding Agency (ESFA) has recently introduced the concept of Related Party Transactions, which further restrict when (and, more importantly, how much) related parties can be paid. The new rules came into force from April 2019 and should be of concern to all academy trusts, but particularly to faith academy trusts that purchase services from their diocese. 

Faith academy trusts frequently purchase services from their supporting diocese; often the services are necessarily purchased from (and can only be provided by) the diocese because the faith academy trust must comply with certain rules to operate as a faith academy trust – for instance, the purchasing of RE curriculum materials from the diocese to ensure that RE is taught in an acceptable way. Alternatively, the diocese may be best placed (but not necessarily the only source) to provide non-faith services – for instance, support with building projects to ensure that any new buildings built on diocesan land will meet the needs of the school but also automatically obtain diocesan approval. 
The ESFA has taken a reasonable approach to services provided by dioceses that are “[e]ssential functions fundamental to the religious character and ethos of the [academy trust]” and deemed these contracts to be automatically provided “at cost” and therefore not needing further investigation. 

However, the ESFA has applied a much more onerous test for all other non-essential services provided by the diocese. From 1 September 2019, academy trusts must seek prior approval from the ESFA before entering: 

  • a single contract or agreement exceeding £20,000; or
  • a contract or agreement of any value where the total value of all contracts and agreements with that party exceeds £20,000 in a financial year

Faith academy trusts which propose to enter into non-essential (but arguably still warranted) contracts with their diocese that fall within the above categories will need to seek the prior approval of the ESFA from 1 September 2019 before entering into the contract. 

For more detail please see our guidance here.

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