Beware of finance leases dressed up as operating leases

A reminder of when academies need ESFA consent.

Background

Suppliers to academies and schools are becoming more familiar with the academies financial handbook and other legal restrictions on what agreements academies and schools can enter into. In general this is a good thing.  Suppliers understand what may require a consent from the ESFA. However, we are seeing a few examples where a finance lease is described as an operating lease with a view to avoiding the need for a ESFA consent (as required by the academies financial handbook).
    
What is an operating lease? - In general terms an operating lease is one where a supplier provides goods or property to a purchaser for a period at a price (usually called a rent). Once the period ends the goods or property return to the supplier. The purchaser knows the goods or property don't belong to it, they know they can use it, but they have to look after it and give it back at the end.

What is a finance lease? - There is no simple all encompassing definition, but it is an arrangement where a supplier provides goods to a purchaser in return for payments over time. Once all the payments have been made then the goods belong to the purchaser. Hire purchase is one example and there are many variations on the theme. Many involve some sort of lump sum or interest, which is how the supplier makes some of its profit.

Our recommendations

1. Purchasers must be careful not to enter into a finance lease without getting an ESFA consent or clearance from ESFA that the arrangement is not a finance lease. It is important to look at the substance of the arrangement and not merely the description written on the document. Giving a document the heading "operating lease" does not necessarily mean the substance of the arrangement is one.  
2. We would also recommend you to be wary of any supplier who offers an operating lease combined with a separate document, assurance or verbal promise that they will donate the goods to you after the rental period. Entering into such arrangements could be considered a sham arrangements dressed up to avoid rules against borrowing and needing an ESFA consent. Such arrangements are not likely to sit well with the regulator or your auditors.