Exercising financial freedom

Since the introduction of grant-maintained schools back in the 1980s, state schools have been able to take more control over their finances and the way they are run. Although grant-maintained status was abolished in 1998 many schools retained that financial control over their finances, and in the year 2000 schools were once again able to obtain funding directly from government through Labour Government introduced Academies.

Following the general election of 2010, it was the new regime’s Education Secretary, Michael Gove, who introduced reforms through the Academies Act, 2010. This has resulted in a significant increase in the number of number of schools opting out of Local Authority control and becoming academies; employers in their own right. Although there are still many schools, most commonly called community schools, controlled and receiving funding through the local council, the number of new Free Schools and Academies continues to grow.

Academies and Free Schools are non-profit making, independent, state-funded schools. They aren’t run by the local council and as well as having control over their own budgets, they are employers in the true sense of the word and can also determine their own pay and conditions for their staff. But of course, that freedom brings with it certain administrative burdens not experienced when they were controlled by the Local Authority and these schools must now decide how they will ensure their staff are paid.

Although they do have the option of operating these duties in-house by setting up their own departments, most Academies and Free Schools are of a size where it is not really cost effective to maintain and resource a fully compliant in house solution. Invariably therefore, they along with the original grant-maintained schools, have chosen to outsource administrative duties such as payroll to external providers.

Sourcing a payroll provider puts Academies and Free Schools on a par with most businesses and employers, and indeed many of the problems they have experienced will be familiar to many a small business. Looking specifically at payroll, one of the first issues for any employer to consider is how their employees will be paid. Like any business the school will have to weigh up the pros and cons, costs and benefits of all the options before securing a preferred payroll provider.

Whilst some Academies and Free Schools are standalone entities, many have been set up by a larger organisation such as a charity or university, an existing business or under an Academies Trust umbrella. If that is the case, then it is an option that responsibility for running the school’s payroll will be taken on by the payroll department of the parent organisation.

Despite having no responsibility for running the payroll for academies in their geographical area (other than by agreement), Local Authorities continue to have responsibility for the community schools in their area and it is likely that there will still be an active team in the council payroll department with specific responsibility for schools.

Keen not to lose work, and indeed even keener to generate income, most, if not all Local Authorities will be willing to provide a fully managed bureau service for the Academies and Free Schools in that area. Alternatively, schools can secure the services of a private sector payroll bureau. Requiring no investment in payroll software or skilled payroll staff, data is usually transferred to the payroll provider by secure email or portal conduit through the completion of template documents.

There are advantages and disadvantages to each of these options which should be considered when offering the payroll function out to tender. Importantly, the school should consider pension administration services alongside the payroll provision and account for this key requirement in their tender specification. Cost, experience of school payrolls & pensions, accuracy and the expected level of service are the most obvious; however there are other issues which must also be considered.

From April 2013 all employers have been required to operate PAYE in real time (RTI) which means that information about payments made to employees, and the tax and Class 1 National Insurance contributions (NICs) deducted from them, must be submitted to Her Majesty’s Revenue and Customs (HMRC) on or before the date that payment is made to the employee. Information about starters and leavers must also be submitted at the time it happens.

Whilst this might sound like a perfectly reasonable requirement, and in most cases it is, there are times when there is a delay in information being passed to the payroll department. Most frequently this happens when responsibility for processing a payroll transfers from one provider to another.

From 6 October 2014 HMRC will begin imposing penalty charges for the late submission of information. When awarding a contract to a new provider this could have a financial impact on a school if there is a delay in the transfer of the payroll data from the old provider to the new.

Another issue which could impact on the timely supply of information to HMRC is the monthly pay cycle operated by the payroll provider. Local Authorities are big employers who usually need to impose rigid deadlines to ensure that they have sufficient time to undertake all the checks on the payroll before payment is actually made to the employees. Very often this deadline will be a couple of weeks before the pay date, meaning that if information is provided late to the payroll department it cannot be included in that submission and must instead be reported in a separate submission or wait until the following month.

However, Local Authorities operating a ‘managed payroll service’ for independent Academies and Free Schools will be more flexible in respect of deadlines with those customers as the processing volumes, compared to main authority payrolls, are much smaller. Private sector providers can also offer this flexibility.

It cannot have escaped anyone’s notice that public sector pensions are changing as part of wider pension reforms which include ‘Automatic Enrolment’.

The Local Government Pension Scheme (LGPS) for England and Wales changed in April 2014, whilst the LGPS for Scotland along with the Teachers’ Pension Scheme (TPS) will change in April 2015. This in itself may pose problems for payroll departments trying to determine which scheme is applicable when a payment is made around the time of transition.

However, it is the enduring relationship between some schools and the Local Authority administering the pension schemes which could potentially have a bigger impact.

This is unlikely to be a problem for an Academy or Free School as they have the responsibility for liaising with the different pension schemes or can delegate this function to their payroll provider as required.

It can however, be an issue for the grant‑maintained schools who have decided to use a provider other than the Local Authority. Their teachers and support staff, who remain members of the TPS or the LGPS, remain under the jurisdiction of the Local Authority who remains the authorised contact responsible for administering the schemes.

Thus, the Local Authority is responsible for submitting the Annual Service Return to the TPS, and the monthly contributions for the LGPS. There are some Local Authorities who feel they have no option but to charge for submitting returns for schools for whom they do not operate the payroll, even if the returns themselves have actually been completed by an external payroll provider. But there are other councils who are happy to submit these returns on behalf of the school, and deal with any resulting queries. For these particular schools careful research is vital when considering offering their payroll out for tender to ensure that they are aware of any associated costs which may not be initially apparent.

The success of both RTI and pension submissions are reliant on the speedy transfer of information from HR to the payroll department. Whether HR is dealt with by the school itself in-house, by the Local Authority, or by another external provider, it is vital that schools consider the process and timescales for the transfer of information such as starters, leavers, sickness absences, supply teachers etc. and that Service Level Agreements are robust to avoid penalty charges being incurred by missing statutory deadlines.

As from April 2014 most UK employers can claim the Employment Allowance and reduce their employer NICs by up to £2,000. However, there are certain employers who are excluded from this including Local Authorities. Schools remaining under Local Authority control are not eligible to claim the Employment Allowance; however Academies and Free Schools may be entitled to claim. A word of caution though, as nothing is ever as straight forward as it seems. If a business belongs to a group of businesses or a charity is part of a charities structure, only one business or charity can claim the allowance. So if an Academy or Free School has been set up by a larger organisation, it may be that that larger organisation is already claiming the Employment Allowance. Each school must determine its status and advise its payroll provider whether or not they are eligible to claim the Employment Allowance. And as ever these days, there will be a penalty charge imposed if an organisation claims the allowance when it is not entitled.

What sets Academies and Free Schools apart from the more conventional community school is the freedom of choice. Academies and Free Schools have the opportunity to source a provider that best suits their needs. Whether they continue to look to the Local Authority or source a commercial supplier is now a business choice. And like any business, the quality and level of service delivered must be monitored and evaluated before the contract is due for renewal before the whole process begins again.