Key management issues for academies

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Elizabeth Davis and Liz Batten from our Schools team outline some of the fundamentals which have to be addressed in the management of academies. This article originally appeared in Charities Management, Autumn 2012.

In the two years since the Academies Act received Royal Assent in July 2010 over 500 schools have converted to become academies, with hundreds more applications in the pipeline. This is all part of Michael Gove's "education revolution", and the Government is actively encouraging schools to convert to academy status.

Much has been made of the advantages of becoming an academy. Michael Gove's vision is to cut red tape and give schools more freedom to strive for excellence and improve standards. Academies have greater autonomy and flexibility and they have control over their previously "top-sliced" funding. However, these new freedoms also come with new responsibilities and challenges.

All academies are run by a charitable company with exempt charitable status. All contracts and other legal affairs of academies are made in the name of the charitable company. The directors of the company are responsible for the day-to-day operation of the academy (or academies) which are run by the company.

They are therefore responsible for: the daily running of the academies and the management of their business affairs; maintaining a high standard of education; ensuring that all records and reports are maintained and filed as appropriate. They are also responsible for managing the company's finances and property. Where the company is responsible for a number of academy schools the directors may delegate the day to day running of the individual academies to a local governing body which is accountable to the directors.

In this capacity, directors (as well as head teachers and business managers) and any local governing bodies at new academies will be faced with a number of new legal considerations that arise as a result of the school becoming part of an exempt charitable company, which is the employer of all of the school staff and the leaseholder of the school site.

Employing staff

Probably the most significant change for the majority of new academies is the academy company becoming the employer of all of the school staff and therefore being directly responsible for its HR, payroll and pensions issues. Academies need to be careful not to make lots of changes to terms and conditions too quickly, but one of the key benefits of being an academy is the freedom from national pay and conditions for staff.

Despite this freedom, the academy sector does not yet seem to have significantly moved away from national pay and conditions. Most academies have made no changes and have no plans to do so. It therefore seems that change will be slow, possibly due to fears of union opposition to perceived inequities, resultant disharmony within the sector and concerns about the risk of shortages of teachers in less advantaged areas.

Making changes Notwithstanding the political and cultural challenges surrounding changes to teachers' pay and conditions in academies, it is likely that most new academies will eventually want to consider making changes to some extent, even if there is no significant departure from national pay and conditions. Academy companies are also responsible for pensions and dealing with any employment issues that arise with staff. Handling these matters in compliance with the law can put a huge burden on management.

Many new academies choose to continue using the HR and payroll services of their local authority after conversion. However, it is important to remember that the local authority is no longer the employer, and the academy company remains legally responsible for all employment issues. Outsourcing HR and payroll may help with practical day to day affairs, but directors should always consider whether specialist legal advice is required for any specific issues that arise.

The school site

Most academies occupy the school site under a 125 year lease to the academy company from their local authority (although, in some cases, there may also be foundation land or other ownership or occupation arrangements). Becoming the leaseholder of the land creates some important conditions and obligations that directors and managers at academies need to keep in mind as the academy grows and develops.

It is important that the directors and managers at academies understand the terms and conditions which apply under the 125 year lease. In some cases consent will be required (for example, entering into a sublease or if alterations are required to buildings), but in others the obligation is simply to keep the local authority informed (for example, if the condition of the buildings deteriorates). Understanding the academy company's obligations will avoid the risk of breaching the terms and conditions of the lease and ending up in an uncomfortable and difficult situation.

In addition to managing the relationship with the local authority, in its capacity as landlord, there are other legal obligations that arise for the academy company as leaseholder. In particular, it is essential to comply with all statutory requirements to obtain appropriate surveys, certificates and other checks whenever any works are carried out. For example, a FENSA certificate should always be obtained for electrical works, installing a new boiler, or replacing doors and windows.

Asbestos removal

Another key issue for many new academies is the management of asbestos, which exists in a significant number of school buildings around the country. On conversion, responsibility for the management or removal of asbestos at the academy site is passed to the academy company. This means that any future direct and indirect costs arising from the need for asbestos to be removed from the site (including any incidental costs, for example temporary buildings) need to be met by the academy itself.

This will be an important consideration whenever any works are carried out to buildings containing asbestos. Although the academy company will receive general funding for repairs and maintenance of the site from the Education Funding Agency (EFA), it is likely to have to apply to it for additional funding from the Academies Capital Maintenance Fund to cover the costs of any asbestos removal. Both the Department for Education and the Health & Safety Executive publish useful guidance on managing asbestos.

Contracting and procurement

Most new academy companies are looking to maximise their "top-slice" funding by shopping around for the services that were previously supplied by their local authority. The process of contracting for these services independently from the local authority involves new requirements and considerations for managers.

Academies are publicly funded and their directors are accountable for all expenditure of grant funding and for the conduct of the academies which are run by the company. Careful consideration should be given to all contracts for goods and services to ensure the appropriate and effective use of public funds, and to minimise legal risk. Academies must deal with contractors in a fair and equitable manner without private gain for their directors, and should avoid any suggestion of impropriety or corruption.

In addition to the general requirements, for some larger purchases it will be necessary to comply with the law on public procurement. This will involve a competitive tendering process, but the extent of the requirements depends on the nature and value of the contract, so professional advice may be required if the directors are unsure of the requirements.

Being an exempt charitable company

All academies are formed as charitable companies with exempt charity status. So the directors need to ensure compliance with company law and charity law requirements. However, the exempt status means that they do not need to register with the Charity Commission and are, instead, regulated primarily by the Secretary of State for Education although Charity Commission involvement may be required for particular situations.

Authority and responsibility may be delegated by the board of directors to headteachers and managers at the academies, but the overall responsibility for the affairs of the academies rests with the directors, who must keep the company solvent and well managed.

It is important for all directors to understand their responsibilities and duties under company law and to ensure that the company's records are kept up-to-date, and that all appropriate filings are made with Companies House. Academies may wish to consider organising professional training for directors who are unfamiliar with their statutory duties and responsibilities.

In addition to the company law requirements, directors must ensure compliance with charity law. In particular, this involves ensuring that the charitable objects (i.e. the advancement of education) are delivered, filing all necessary reports and returns with EFA, and taking special care when investing the funds of the academy. It is important to remember that the assets and funds of academies must only be used to further the company's objects, and EFA closely monitors the use of annual grant funding.

Other governance considerations

Before the DfE will consent to the academy conversion of a school, it requires confirmation that the new academy will have all of the necessary insurances in place from midnight on the date of conversion. The need to maintain appropriate and sufficient levels of insurance cover is an ongoing and essential requirement, so directors should keep this under regular review. Guidance on suggested levels and types of insurance can be found on the DfE website.

Academies have significant tax advantages due to their charitable status and are normally exempt from direct taxes but care is needed to ensure eligibility. However, there are certain circumstances where taxes may be payable, in particular in relation to VAT. Where local community groups make use of the academy site, the VAT position is complex and guidance may be required from HMRC and EFA.

Financial management

In relation to financial management, it is very important that directors and managers at academies understand the terms and conditions set out in their funding agreements. The funding agreement is a legally binding contract between the academy company and the Secretary of State setting out the arrangements that must be complied with as a condition of receiving grant funding. Academies are accountable to the Secretary of State for the effective use of their funding, and it is important to ensure ongoing compliance with the terms of the funding agreement and all DfE and EFA guidance on financial management.

Although academies have a lot of flexibility in terms of their management, there are a number of matters where the Secretary of State's prior consent will be required. These are set out in the funding agreement and include borrowing from the private sector (including overdraft facilities) where the borrowing will be repaid from grant funding or secured on academy assets that were purchased with grant funding, and entering into any guarantees, indemnities and letters of comfort.