ACADEMIES BACK TO SCHOOL REPORT

January 2016

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CONTENTS

A word from Mike 3

Keeping children safe in education 4

Major changes to employment taxes 7

Is your academy ready for the new data protection legislation? 9

A going concern 12

A one size CFO will not fit all 14

Contacts and contributors 16

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A WORD FROM MIKE

Welcome to the first Back to school report of 2016 - our first under our new identity as RSM.

In December 2015, Sir Michael Wilshaw released his latest Annual Report as Chief Inspector. Core to his continuing concerns about the ability of the education sector to deliver continuous improvement is the ‘capacity’ of the sector, particularly in terms of leadership.

This isn’t a surprise. In basic macro-economic terms, supply and demand are out of balance. As academy trusts continue to grow rapidly in number, so does the demand for trustees and board members with the necessary skills and expertise to fulfil what can be a very demanding, albeit unpaid, role. It is a truism also that often those with the necessary skills and expertise are also those with the least time available to devote to the role. This situation is unlikely to improve in the near future, so perhaps time to look at alternative governance structures to address this imbalance? A topic for another edition of this report perhaps.

Of more immediate interest, in this edition we look at a number of recent, and impending, legislative changes:

• the latest guidance on safeguarding, particularly responsibilities in relation to the government’s Prevent strategy as inspections continue to identify weaknesses in this crucial area;

• major changes affecting employment tax that come into effect from April 2016; and

• implications arising from the new EU Data Protection legislation.

Following on from the completion of the 2014/15 financial statements audits, we also cover:

• issues around going concern and the mitigating controls you should have in place; and

• things to consider in recruiting a new Chief Financial Officer, a crucial position as many academies face a tough financial future.

As ever, if you have any queries, or suggestions for future editions of this report, please feel free to contact either myself, or your usual RSM contact, and we will be delighted to help.

Yours sincerely

Mike CheethamNational Head of Academies Partner, Risk AssuranceM +44 (0)7800 617204 mike.cheetham@rsmuk.com 3

The Department for Education (DfE) recently re-issued statutory guidance, applicable to all schools, setting out what they must do to safeguard and promote the welfare of children and young people under the age of 18. Updates include reference to Prevent, radicalisation and promoting British values.

This links directly to Ofsted’s common inspection framework, which makes it clear that the welfare of pupils should be safeguarded in order to prevent radicalisation and extremism. In this context, all academies have a duty to protect the welfare of children and vulnerable adults; including:

• protection from maltreatment;

• preventing impairment of health and development; and

• promoting welfare and protecting from harm.

The Prevent duty is defined within the guidance as ‘to have due regard to the need to prevent people from being drawn into terrorism.’ This is quite onerous, but should be considered within the wider Ofsted context, and not in isolation. Equally, it is important to remember that the guidance is not designed to stifle open debate or discussion relating to controversial issues; it aims to guarantee a safe environment in which debate should be encouraged and extremist views challenged.

The guidance places responsibilities on head teachers, teachers, other academy staff, governing bodies and trustees. Some of these responsibilities, together with examples of what we have seen in practice across our education clients are as follows:

Responsibility: All staff must have read part one of the guidance.

Academies have a responsibility to ensure their employees have read and understood the guidance. Therefore:

• Do you have a process to ensure all existing and new members of staff read the guidance?

• Are you seeking written confirmation from staff that they have read and understood the guidance?

In respect of Prevent, the guidance strongly emphasises the need for staff to undergo training so that they are properly equipped to recognise children who may be at risk. The Home Office has its own training for this purpose, known as the Workshop to Raise Awareness of Prevent (WRAP). As a minimum, we would expect each school’s safeguarding lead should have completed this training.

KEEPING CHILDREN SAFE IN EDUCATION

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Responsibility: Maintaining, and publicising, an appropriate set of policies.

• Have you updated your safeguarding policies to reflect the changes in the updated guidance?

• Do your employee handbook and staff disciplinary/conduct policies fully comply?

• Is your whistleblowing policy sufficiently detailed?

• Have staff been made aware of the policy changes, and are these readily accessible on your website?

The internet and social media are some of the most common methods adopted by extremist groups or those promoting extremist ideologies. Therefore it is essential that academies adopt acceptable usage policies and web filtering to prevent such materials being accessed at school or through using school IT equipment.

Responsibility: Managing the risks.

• Has your risk register been reviewed and updated to reflect the safeguarding risks and responsibilities?

• Have the trustees received appropriate assurances that the mitigating controls referred to in the risk register are operating effectively in practice?

• Have you completed the required assessment of the risk of children being drawn into terrorism? This relates both to a general understanding of how children may be at risk, and also being alert to the circumstances of individual children who may be at risk.

Responsibility: Single central record.

Are you sure that your register is: complete; up to date; and easily accessible?

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Practical mattersGood practice examples, where we have seen clear demonstrations of how clients are fulfilling these responsibilities are:

• clear and accessible policies and procedural documentation defining the duties of all staff and designated safeguarding leads;

• requirements that all members of staff undertake Prevent training, including contractors’ staff (eg catering and security staff);

• training for governors, and designating a governor as a safeguarding lead for the board;

• establishing ongoing working relationships with local partnerships, such as the Prevent Engagement Officer within the local police force;

• vetting and supervision of all external speakers who attend events on the premises; and

• regular monitoring of internet and IT equipment usage.

There are also academies that are showing common weaknesses in controls which became apparent to us during some of our internal audit reviews. These include:

• mitigating controls or actions to be followed until an appropriate DBS check is received for new staff are not always recorded on risk assessments;

• central logging of all risk assessments which leads to some departments not having completed a risk assessment for all relevant activities; and

• contact details for a parent, carer, person acting in loco parentis, or next of kin for all learners aged up to 18 not always recorded.

None of these are difficult to get right, but they do take time and effort, which with many other competing pressures on staff means that they can fall by the wayside.

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MAJOR CHANGES TO EMPLOYMENT TAX

From April this year, new measures aimed at simplifying tax compliance for employers will be introduced.

The end of dispensationsCurrently, employers are required to report employees’ business expenses on P11Ds unless they have obtained a dispensation. From 6 April 2016 an exemption for business expenses will remove this requirement, making dispensations invalid. The exemption will not apply to expenses provided in conjunction with salary sacrifice schemes.

Employers will need to ensure that only tax deductible expenses are paid without being reported on P11Ds. This means employers should have sufficient processes and policies in place to capture any expenses not covered within the exemption.

The exemption will also apply to scale rate expenses paid in an approved way. Employers who already have an HMRC agreement to pay bespoke scale rate expenses must, before 6 April 2016, notify HMRC that they want this to continue or agree a new scale rate with HMRC. There is likely to be a rush of employers doing this in the lead up to the deadline, so early contact with HMRC is advised.

Academies are advised to begin preparing for this change before 6 April 2016.

RSM can support you through this change by reviewing your systems and policies to ensure that expenses paid are in line with HMRC’s views of what constitutes a business expense.

Formal payrolling of benefits for taxFrom 6 April 2016 employers will have the option to formally tax benefits via the payroll. Employers doing this won’t need to report payrolled benefits on P11Ds and HMRC will remove these benefits from employees’ tax codes. Employers will still need to complete an annual P11D(b) to report and pay their Class 1A NICs.

Formal payrolling won’t apply to living accommodation, loans, vouchers, and credit cards. These benefits can be payrolled, but informally and without removing the P11D obligation.

Employers wishing to payroll benefits for 2016/17, including those already doing so informally, should have registered online with HMRC by 21 December 2015 to ensure 2016/17 tax codes, that have started to be issued are more likely to be correct. Employers who have not registered by 6 April 2016 won’t be able to payroll benefits formally for 2016/17.

What are the benefits?One advantage of payrolling is the reduction in P11D administration. This makes payrolling feel compelling but, in reality, payrolling could increase in-year administration and make monthly payroll compliance more complex.

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Salary sacrifice for travel and subsistence As part of a huge change to the rules, and part of a wider HMRC review of the travel and subsistence rules, from 6 April 2016 employers paying tax and NICs free travel and subsistence payments to employees, funded by salary sacrifice, must operate PAYE on those payments.

Legislation abolishing NICs relief is expected before April 2016, removing the NICs saving employers operating these arrangements have enjoyed.

Affected employees will be able to claim a tax deduction for their actual travel and subsistence expenses personally and HMRC has said it will make this easier for employees.

Lower paid employeesEmployers with lower paid employees receiving benefits should be aware that, from 6 April 2016, the £8,500 threshold is being removed making most benefits provided to such employees reportable, taxable, and liable to Class 1A NICs.

While some employees will be sheltered from additional tax by their personal allowance some, however, will not and will start to receive P11Ds for the first time. Employers won’t have the luxury of the personal allowance to shelter them from an increased Class 1A NICs charge.

This may impact some cleaning and other support staff within academies.

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IS YOUR ACADEMY READY FOR THE NEW DATA PROTECTION LEGISLATION?

At the moment, UK data protection obligations are primarily governed by the Data Protection Act 1998. However, there’s a new law coming into force that could impact your academy if you don’t act now and prepare for it.

Later in 2016, a major overhaul of the EU data protection laws will come into force that will necessarily lead to a change in business processes and potentially much higher financial penalties for breaches of the rules.

The key impacts and considerations for your academy are:

• fines up to €100m or 5 per cent of annual income;

• enforcement regime instead of self-regulation and education;

• explicit consent for data collection, data usage and marketing;

• individual right to claim compensation and a simplified process for compensation claims; and

• ‘the right to be forgotten’ - whereby individuals must be provided with the option to have their data deleted.

What are the implications for your academy?

Fines and compensation:The risk of fines and compensation claims is increased given the amplified number of areas where academies may fail to comply, and therefore there will be an onus on you to prove consent regarding the process of obtaining personal information. This should be achieved by making the language simple, not hiding information in privacy statements, making the sign-up process clear for data input requirements. Moreover, the need for assurance that the security of systems is adequate to help mitigate confidentiality breaches becomes increasingly important.

Consent:In relation to the point above, consent of individuals is generally needed in order to process their personal data lawfully. It has proved difficult for many organisations to develop practical methods of compliance, particularly for online requirements. However, instead of seeking to simplify this problem, the draft regulation proposes to raise the bar for consent so that it must be ‘explicit’ in all cases, regardless of context. This will almost certainly make it even more difficult for academies to be confident of having achieved compliance.

Increased bureaucracy:Academies are free to adopt a risk-based approach to compliance at the moment. However, under the proposed regulation, detailed records documenting compliance measures would have to be maintained at all times, regardless of the actual risk to personal data (failure to do so could lead to a fine). Academies will have to appoint internal data protection officers to oversee and monitor compliance. The Information Commissioner’s Office will have to be promptly notified in the event of any data security breach. There will also be updated rules on the transfer of personal data outside of Europe which may be particularly relevant for any overseas students.

These issues clearly will lead to additional processes and resource requirements and it is important that organisations approach these challenges in the right way to ensure significant additional costs are not incurred.

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What do you need to do ahead of the new regulation?The Act is anticipated to come into force towards the end of 2016, which doesn’t give you long to change how you work, to replace data, to change websites, amend contracts, terms and conditions and privacy policies. It is therefore important that you take the time now to understand the changes which are underway and how they will affect how your school.

IT systems and business processes need to be considered in relation to methods for obtaining consent for personal data. These may need to be changed as well as the steps needed to facilitate both the portability and permanent deletion of data. It may be better to wait until there is greater certainty and clarity before going ahead with major new system implementations. Where this is not practical, try to ensure that systems have some flexibility to meet changing conditions and make provisions for additional implementation costs.

New requirements for portability and deletion of data:Students and other individuals will have a new right to demand a file of their personal data. They will also have the right to insist that all data about them is deleted. Academies will have to set up new processes that facilitate these rights – and there is considerable uncertainty over what steps they will be obliged to take in practice. This clearly has far reaching implications on organisational processes and the subsequent need for a robust information management system to manage data overall.

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Increased costs:Estimates of the possible cost/benefit are certainly being debated. Our view is that, compared with the existing regime, there are likely to be significant additional costs for all organisations, including:

• a substantial one-off cost from the need to revise compliance procedures, redesign IT systems such as customer databases, CRM systems and e-commerce software and review/update legacy data to meet the new requirements outlined above – particularly the new definition of consent, data portability and ‘the right to be forgotten’; and

• increased on-going costs as a result of a significantly more onerous and bureaucratic regulatory regime, including the appointment of ‘data protection officers’.

There is a lot to consider ahead of the new act coming into place. We currently work with a number of academies, assisting them to manage their data risks and help ensure compliance with regulatory obligations.

Our readiness assessment is specifically designed to help organisations safeguard that their internal processes are adapted and re-designed to meet the new legislative requirements, whilst minimising costs in doing so. By being prepared for the changes in legislation ahead of its implementation is imperative to avoid the risk of substantial fines.

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A GOING CONCERN

Increasingly a topic of discussion at governors and trustees meetings, going concern – technically, an academy trust’s ability to meet their liabilities as they fall due - is a current and very relevant issue for many trusts. This is irrespective of whether or not you have a forecast deficit for the year ahead.

The Charity Commission guidance is clear that as Trustees, ‘you have a legal duty to look after your charity’s money and other assets. You need to understand and keep track of your charity’s income and spending to spot any issues as early as possible.’ The Commission goes on to say that in order to do this ‘you need trustees with the right skills and experience to understand financial information, identify and manage risks. Hold regular trustee meetings to keep track of income and spending against the budget. Put internal financial controls in place to make sure all spending is properly authorised.’ (www.gov.uk/guidance/financial-difficulties-in-charities)

One area highlighted above is the need to monitor income and spending against the budget. This not only serves as a tool to keep track of any significant variations in income expected and planned costs, but also a measure of the robustness of your budgeting process.

The Academy Financial Handbook (AFH) 2015 reminds trustees that they must approve a balanced budget, but one which can take into account brought forward reserves. A lack of reserves was one of the reasons behind the very public downfall in 2015 of a high profile charity. Having a sound reserves policy in place therefore should be a must for all academy trusts. The AFH also goes on to note that a board of trustees must ‘receive and consider information on financial performance at least three times a year, and take appropriate action to ensure ongoing viability.’ (AFH: para. 2.2.4)

A few relevant questions to consider as an academy trust might be:

• how robust is the challenge within your trust? Do the trustees really understand the financial information they are looking at and how it has been derived? and

• are the budgets produced broadly accurate over time and when significant variances arise, what actions are taken and are these effective?

The AFH 2015 also touches briefly on cash management, in terms of managing the cash position and avoiding going overdrawn. In reality though, this is one of the fundamentals to going concern – it isn’t a lack of financial surplus, but a lack of cash, that creates the inability to meet liabilities as they fall due. (AFH 2015: para. 2.2.6)

The area of financial sustainability is one that the EFA is already looking at in both the financial statements submitted through document exchange last December 2015, and the upcoming budget forecast returns. This return requires an academy trust to focus on the next 12 months. As trustees though, your responsibility is for the long term financial viability of the academy trust. This means thinking at least 3-5 years ahead, and often longer, and devising action plans to address any forecast issues. Action plans may include cost rationalisation, diversifying income streams, growing/declining pupil numbers, collaboration of some kind with other schools or academy trusts.

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In addition to the above, the Governance Handbook released by the EFA on 25 November 2015 covers the topic of budget and financial management, including relating this back to ensuring there are appropriate skills on the governing body/board of trustees. The handbook notes that ‘asking the right questions is equally important in relation to money as it is to educational performance. Appropriate questions might include:

• are resources allocated in line with the school’s strategic priorities?

• does the school have a clear budget forecast, ideally for the next three years, which identifies spending opportunities and risks and sets how these will be mitigated?

• does the school have sufficient reserves to cover major changes such as re-structuring, and any risks identified in the budget forecast?

• is the school making best use of its budget, including in relation to planning and delivery of the curriculum?

• does the school plan its budgets on a bottom up basis driven by curriculum planning (ie is the school spending its money in accordance with its priorities) or is the budget set by simply making minor adjustments to last year’s budget to ensure there is a surplus?

• are the school’s assets and financial resources being used efficiently? and

• how can better value for money be achieved from the budget?’

On 12 January 2016 the Department’s financial health and efficiency webpage for schools was launched (www.gov.uk/government/collections/schools-financial-health-and-efficiency).

This part of the website includes a number of useful videos and tools for academy trusts, including top tips for financial planning at both operational and governor level. There is also a page entitled ‘Schools financial efficiency: the role of the school governor’ with access to academy benchmarking, a video to watch and other documents to read and share.

As all trusts know from the Accounts Direction, a statement by the trustees on the academy trust’s ability to continue to operate as a going concern is required as best practice in the financial statements. The Guidance on Risk Management and Internal Control and Related Financial and Business Reporting, issued by the Financial Reporting Council (FRC) is primarily directed to companies subject to the UK Corporate Governance Code but should be considered by directors and trustees of other entities as relevant guidance in this area.

This report comments that ‘the board’s specific responsibility for determining whether to adopt the going concern basis of accounting and related disclosures of material uncertainties in the financial statements is a sub set of broader responsibilities. A company that is able to adopt the going concern basis of accounting and does not have related material uncertainties to report, for the purposes of the financial statements, is not necessarily free of risks that would threaten the company’s business model, future performance, solvency or liquidity were they to materialise. The board is responsible for ensuring this distinction is understood internally and communicated externally.’

This reiterates the responsibilities of trustees of academy trusts that going concern is not just a form of words used once a year in the annual financial statements, but needs to be a sustaining ethos across the academy trust.

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A ONE SIZE CFO WILL NOT FIT ALL

Running a school is a challenging business. The focus on raising education standards in the UK is set against a backdrop of funding changes and moving targets. A growing number of schools are becoming academies and multi-academy trusts (MATs). Principals and head teachers are being asked to do more with less, to make difficult decisions in a culture of reducing budgets and greater competition.

Not only do schools and academies need financial rigour but many require strategic capability to assess options for the future. The type and nature of the school/academy/trust, the experience of the principal/head teacher and the strategic vision of the board, means a one size CFO will not fit all. Add in the broader debate about other support services – premises, human resources, catering, IT and the people dimension of leading numbers of staff and it gets even more complex. As a consequence there are a number of challenges when recruiting a good CFO, as they need to be an integral part of the school’s senior leadership team, alongside the head teacher and their counter-part leading teaching and learning.

Given the change in context, the role requires individuals who possess the gravitas and know-how, to play a pivotal role in advising on, and implementing school-wide strategies. It is an influencing role which instils an approach of astute resource management and enables teachers to deliver the best progress and outcomes for young people.

Things to consider:

Financially qualified, or suitably experienced, or both?In the UK across both the state and independent schools sectors there are a number of bursars/school business managers/CFOs who are not financially qualified but who are suitably experienced. A number have a qualified finance manager reporting to them.

This is an important decision; some schools who have not appointed a qualified accountant as CFO, have run into financial difficulties and found the CFO lacked the necessary skills to fulfil the role in the school’s context, even when they have undertaken a comparable role elsewhere. It can be even more of a challenge to recruit a suitably qualified/experienced CFO to a school, if there is not a clear proposition. Potentially good candidates need to be able to answer, ‘why do I want to be CFO in this school?’

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Appointing someone from outside or inside the sector?At first glance it can be easy to assume that to be a good CFO requires prior experience of working in a school/educational setting. However, there are many examples of individuals successfully transferring directly from the private sector, military and the wider public sector. At assessment centres and interviews many have outshone individuals who have experience in the sector.

Whether the CFO needs to have school experience may depend on the vision and direction of travel for the school; for example is it likely to become an academy, or if already an academy, a MAT? The key question is can you find the skills required within or outside the sector?

A CFO for today and tomorrow?As already mentioned the landscape of education is continuously changing. It may be very different in 12-18 months, and it is challenging for a school to recruit based on the unknown. However, it is important to consider questions such as how operational/strategic do we need the CFO to be, do they need experience of income generation, budget reductions? Will they need the skills and appetite for growth? Can they stand up and challenge those on the board in a constructive way? Is this what we want or will they be too challenging? Finding answers to such questions before starting the recruitment process will make it easier to mitigate poor decision making throughout the recruitment process.

A CFO with people skills? The structure reporting into the CFO within a school can differ. Leadership of non-financial areas such as HR, premises, ICT, catering and administration may mean managing large numbers. Alternatively there may be a need to have experience of managing external contracts for these service areas. Managing non-finance areas will not appeal to all. The balance of the role is a key consideration – in some schools 80 per cent of a CFO’s time is spent on non-financial issues.

Therefore, the challenge is to find a CFO who can work strategically and operationally, can cover finance and the broader operational areas from catering to premises, are equally adept in running contracts alongside teams and has the emotional intelligence and interpersonal skills to win hearts and minds both within the organisation and outside. Shall we just add walking on water and make it a full set of skills?

CFO roles come in all shapes and sizes within schools. There are clearly many challenges in recruiting effective people into these roles, however, by giving careful thought to the points above and not rushing the recruitment process, this will go some way to mitigating the risks of recruiting a good and effective CFO.

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CONTRIBUTORS

The UK group of companies and LLPs trading as RSM is a member of the RSM network. RSM is the trading name used by the members of the RSM network. Each member of the RSM network is an independent accounting and consulting firm each of which practises in its own right. The RSM network is not itself a separate legal entity of any description in any jurisdiction. The RSM network is administered by RSM International Limited, a company registered in England and Wales (company number 4040598) whose registered office is at 11 Old Jewry, London EC2R 8DU. The brand and trademark RSM and other intellectual property rights used by members of the network are owned by RSM International Association, an association governed by article 60 et seq of the Civil Code of Switzerland whose seat is in Zug.

RSM UK Consulting LLP, RSM Corporate Finance LLP, RSM Restructuring Advisory LLP, RSM Risk Assurance Services LLP, RSM Tax and Advisory Services LLP, RSM UK Audit LLP and RSM UK Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. RSM Creditor Services LLP is authorised and regulated by the Financial Conduct Authority for credit-related regulated activities. RSM and Co (UK) Limited is authorised and regulated by the Financial Conduct Authority to conduct a range of investment business activities. Whilst every effort has been made to ensure accuracy, information contained in this communication may not be comprehensive and recipients should not act upon it without seeking professional advice.

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A one size CFO will not fit all was written by:Mike PhillipsManaging Director Pentir Talent SolutionsT +44 (0)7830 313915 mike.phillips@pentir.com www.pentir.com

Caroline RaiHead of Public Sector Tax Partner, Employment TaxT +44 (0)20 3201 8162 caroline.rai@rsmuk.com

Hannah CatchpoolPartner, AuditT +44 (0)20 3201 8097 M +44 (0)7966 416286 hannah.catchpool@rsmuk.com

Steve SnaithPartner, Head of IT AssuranceT +44 (0)20 3201 8674 steven.snaith@rsmuk.com

Mike CheethamNational Head of Academies Partner, Risk AssuranceM +44 (0)7800 617204 mike.cheetham@rsmuk.com

CONTACTS