Revealed: leading free schools chain needs extra cash to survive

An academy chain which runs five free schools posted a deficit of �1.6m in the last academic year and has said its survival depends on the government continuing to provide cash “beyond the normal funding arrangements”, Education Uncovered can reveal.

Chapel Street Community Schools Trust, which operates seven schools including five frees, was given a £750,000 government loan in 2016-17, which its annual accounts say is to be “repaid from future surpluses”. Yet the trust is still keen to bid to open more free schools and take over existing academies.

The disclosures come in accounts which were qualified by the trust’s auditors, with James Royal, Chapel Street’s chief executive, confirming four aspects of “material irregularity, impropriety or funding non-compliance”, including “inadequate reporting and budget monitoring”.

The Christian-linked Chapel Street, based in Morden, south London, was at one stage one of the government’s favourite free schools operators, having opened all five institutions in the period 2012-15. With five frees, it remains joint-third on the list of academy chains with the most free schools.

But its 2016-17 accounts, published with the chain still subject to a “financial notice to improve” from the government, will make disturbing reading for ministers.

Chapel Street, which received core funding from the Education and Skills Funding Agency (ESFA) of £10 million in 2016-17, had three of its seven schools in deficit that year. One of them, Benedict primary in Mitcham, south London, was £673,113 in arrears. In addition, the trust’s central headquarters services posted a deficit of £651,585, despite the accounts revealing that its schools pay a possibly higher-than-average charge for these services, at six per cent. Notes to the accounts suggest “high consultancy fees” and “insufficient funding from the ESFA” have paid a part in these deficits.

The deficits total £1,619,814, which is an increase of more than £200,000 on the £1.4m figure they stood at the previous year.

The accounts state: “At the year end the Academy Trust is carrying a net deficit of £1,619,814 on restricted general funds (excluding the pension reserve). The Academy Trust’s principal funding body, the Education and Skills Funding Agency (ESFA) has advanced funding of £750,000 to the Trust this year, to be repaid from future surpluses.

“The Board of Trustees has a reasonable expectation that the Academy Trust has adequate resources to continue to in operational existence for the foreseeable future, providing the Academy Trust can secure continued financial support of the Academy Trust’s principal funding body, the Education and Skills Funding Agency, beyond the normal funding arrangements”.

An independent auditor also writes in the accounts: “The continued financial support of ESFA, beyond these existing funding arrangements, will be necessary for the Trust to continue as a going concern.”

In his report within the accounts, Royal states that there have been “instances of material irregularity, impropriety or funding non-compliance” in respect of “inadequate interim reporting and budget monitoring”; “systematic issues with timely preparation of accurate bank reconciliations and appropriate, effective review”; “invoices have been split into multiple payments in breach of payment controls”; and “There has been no programme of external assurance or risk review as required in section 2.4.9 of the Academies Financial Handbook”.

These statements are repeated in a report by an independent reporting accountant.

Reasons offered for deficits

The accounts offer some explanations as to why Chapel Street has posted its deficits. At Benedict primary, which is not a free school, they say: “the deficit has arisen because the school continues to struggle against the back drop of historic financial issues and the heavy requirement necessary to support children with a broad spectrum of needs in a deprived area.

“Insufficient funding from the ESFA was initially requested and as such, the school continues to struggle.”

At Burnley High School, a free school in the Lancashire town which opened in September 2014, the accounts say “the deficit has arisen because until April 2017, the school was still in rented accommodation where costs were not met by the ESFA”.

With regard to the central services deficit, they say: “the deficit has arisen due to high consultancy fees, salary costs for a larger team within Head Office and costly Brought in Services instead of looking to secure better procurement deals.”

The accounts add: “A number of schools overspent their budget in 2016-17. This occurred due to various factors including pupil number adjustment clawbacks; over-investment to counter high needs provision; and historic financial issues rolling into this financial year from prior years.

“The Trust is currently still under the Financial Notice to Improve…and has made efforts to make improvements…but it is recognised that much more needs to be done.”

The notes set out some specific measures the trust is taking to address these deficits and that, in general, it is “taking action to return these funds to surplus”.

Chapel Street has also become just the latest in a string of academy trusts to warn that government funding is not keeping pace with cost increases. Its accounts say: “The Trust places considerable reliance on continued government funding. This is likely to remain unchanged in terms of the funding per pupil rate, despite pay, pension and general inflation pressures. This increases the risk of deficits.”

One of Chapel Street’s trustees during 2016-17, William Brooks, served as “accounting officer” for six months. He was paid £50,040 via a company in which he was a significant shareholder, the accounts say. The trust also had a chief executive during this time.

Despite the deficits, the accounts say the trust remains “ambitious about delivering an approach across a growing number of schools.

“Accordingly, the Trust is keen to expand either through existing academies seeking to join the Trust, or via bids to open new schools where there is demonstrable need.”

The trust has been approached for comment.