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Resources


OPINION MINEFIELD A CONTRACTUAL


Beware the pitfalls of accepting an interest-free loan for your school, says Lorraine Ashover, MD of school procurement consultancy Minerva


‘SIMPLE, CLEAR PURPOSE AND PRINCIPLES GIVE RISE TO COMPLEX AND INTELLIGENT BEHAVIOUR. COMPLEX RULES AND REGULATIONS GIVE RISE TO SIMPLE AND STUPID BEHAVIOUR.’


I


n my view, the above comment from Visa credit card founder Dee Hock could be applied to our current school funding system.


I’ve had a frustrating insight into the contradictions created by this complex system while working on behalf of a multi-academy trust. The trust wanted to take up an


offer from its catering contractor to invest in the upgrade of equipment in a school kitchen and dining facilities. The offer was effectively an interest-free loan over the term of the catering contract. The revenue generated by the consequent increase in uptake of meals and service delivery effi ciencies was projected to cover


the upgrade within a year, allowing the trust to balance its books and generate extra cash for urgent maintenance and repairs. But apparently deals like these


aren’t actually allowed. According to the Education and Skills Funding Agency (ESFA), they are a form of borrowing, known as ‘embedded fi nance leases’ under the UK’s Financial Reporting Standards. For several weeks, I batted


questions over to the ESFA about its policy because the Academies Financial Handbook states that trusts can enter into a fi nance lease ‘with permission’. However, the reality, eventually confi rmed by the ESFA, is that fi nance leases are currently only granted for two government- backed schemes (Salix and CIF). While the more costly operating


leases are permitted, the ESFA says the Treasury does not want to see schools borrowing – unless from


initiatives such as Salix and public works loans for new buildings. So the choice for schools that want to upgrade their facilities is either to use a more expensive operating lease or invest capital funds. And digging into the bank account is not a possibility for many schools. Yet many have unwittingly entered


into scenarios that are effectively embedded fi nance leases, as part of contracts for everything from catering equipment and minibuses to mobile phones. Indeed, allowing schools to pursue such leases would signifi cantly reduce funding pressures. Blocking them just creates problems. Even auditors have been unaware of this issue until recently – but the ramifi cations are potentially serious. So perhaps it’s time for the DfE to have a rethink, especially at this diffi cult time, when both schools and contractors need more fl exibility and support. The accounting treatment for


leases is set to change for schools following international accounting standards, where a new standard will require most operating leases to be included on the balance sheet. Meanwhile, individual academy trusts will continue to follow UK standards. So how will the DfE deal with these differing regulations? I’m asking the ESFA to


proactively communicate with schools about catering contract investments. Let’s hope for more clarity and simplicity ahead!


■ Minerva is offering FundEd subscribers 45 minutes of free procurement support. minervapcs.com


FundEd SUMMER 2020 53


IMAGE: Z_WEI / ISTOCKPHOTO.COM


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