How are surplus and deficit balances managed on conversion?

7th December 2023

The Department for Education (DfE) has recently updated it’s guidance Academy conversion: surplus and deficit balance transfer process which sets out what happens when a school that has converted to academy status has either a budget surplus or a budget deficit.

What happens where there is a surplus?

In some cases, on conversion to academy status, a school may have a surplus balance. In this case, in accordance with the Academy Conversions (Transfer of School Surpluses) Regulations 2013 (the “Regulations”), the local authority is required to determine and notify the amount of that surplus within four months of the date of conversion and, if that amount is agreed, pay it to the academy trust within one month.  This means that the local authority and the academy trust are required to work together to reach agreement on the surplus balance.

The academy trust is entitled to make an application to the Secretary of State if it doesn’t agree with the local authority’s position.. This must be done within one month of the local authority confirming its determination, setting out the steps which have been taken to reach agreement. It is important that academy trusts can evidence this step prior to making an application. .

It is possible, but on in exceptional circumstances, for an academy trust to reach out to the Secretary of State to request a review after this one month deadline.

If a review is sought, a decision should be made within three months. However, this timescale may be extended by the Secretary of State and one they have reached a decision, the local authority is required to pay the surplus to the academy trust within one month. In some instances we have seen that the new academy has made commitments against an anticipated surplus. In this instance, the Education and Skills Funding Agency (ESFA) should be approached to seek advice on securing an advance of funding to meet this commitment.

What happens where there is a deficit?

There are times when a school converts with a deficit. In these circumstances, the DfE will reimburse the local authority, and recover the deficit from the academy trust via abatement of General Annual Grant.

It is key that the amount paid to the local authority and recovered from the academy trust is a true and accurate reflection of what is owed;  the DfE will only make a payment to the local authority once the amount is agreed by both parties. In the event of a disputed deficit balance, the academy trust may apply to the Secretary of State for a review.

In some cases, a school may be concerned that the size of its deficit could prevent it from converting, but it may not be eligible for intervention or to be treated as a sponsored academy. In these cases, the local authority may agree to absorb part, or all of, the deficit without insisting on it being repaid.

What about other borrowing?

As well as having a surplus or a deficit balance, schools which are converting may have internal loans outstanding. The DfE expects that the maintained school’s liability to repay a loan made by the local authority would transfer to the academy, for the academy to  continue repayments. However, the local authority and the school may agree to liquidate the loan and pay it off at the point of transfer. The transfer of responsibility for the loan should be reflected in the Commercial Transfer Agreement, or in a separate agreement.

Next steps

If you are considering converting to academy status, or you are an established trust looking to take on a new school, it is vital that you understand the school’s financial position, and any liabilities it may have which will be ongoing following conversion.

Conducting a thorough due diligence exercise at the outset of the project will help you to understand any liabilities which may impact the academy trust. Ensuring that a full Commercial Transfer Agreement is entered into, which covers all contracts and liabilities to be transferred to the academy trust, is vital.

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