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Accounting for Service Charges

We are preparing a set of accounts for a resident management company- that receives in maintenance charges on behalf of tenants and then pays out maintenance expenses etc.

We are aware that the income and expenditure should not be shown in the resident management company's set of accounts, as they are holding any monies received on trust. Any bank balances are also not owned by the company and should not be shown.  

Basically, does that mean for Companies Limited by Guarantee, that they will have zero on their balance sheet and income and expenditure reports?

We propose attaching an appendix for the service charge accounts. I believe guidelines were going to be published to say how these service charge accounts should be produced, but due to a new government this won't be implemented in the short term (if ever). Therefore, can we produce the appendix in whatever way we want, and there are no actual statutory requirements?

I intend just attaching an income and expenditure and balance sheet, with no associated notes?

Many thanks.  

Jason Waters

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Please clarify type of management company

Could you please clarify the type of management company you are referring to.

There are management company businesses that are not owned by the tenants and are carrying on a business.

Then there are those that are owned by the tenants and nobody else. Usually all the tenants are directors and (if limited by shares) shareholders.

For the latter full accounts are usually prepared because funds are owned by the company and it is the company that carries out the maintenance. For corporation tax purposes only income derived from non-members is taxable. EG bank interest.

For the first type these are no different to any other company except for any requirements beyond the Companies Act.

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resident company

It is the latter, where the tenants are directors, sometimes they would own shares but sometimes the company would be limited by guarantee. It's not a case of a trading company deriving its activities from managing lots of blocks (where it's probably even more obvious that monies it receives aren't dont form part of its assets).

So a block of 8 flats where all are directors and shareholders, for example.

As a Limited company, it would have to of course require with Co Act, but the point is it wouldn't actually have any assets/liabilities or income/expenditure (unless it owns the freehold), so there's not much to put in the accounts, providing s.42 applies. Bit of share capital perhaps.  

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Grey area

Most residents' management companies do not own the freehold of the block of long leasehold flats - in other words, the company is not the landlord.  Many of us do not consider that the Landlord & Tenant Act can apply to such residents' management companies, although the wording of the Act does seem to apply generally to anyone receiving service charges.  The Act obviously does apply to (say) commercial properties held on comparatively short leases where the landlord collects a service charge from the tenants.

In the case of residents' management companies which do not own the freehold, it is the general practice to prepare normal accounts without any notion of the service charges being held on trust.  If the company does hold the freehold, the accounts should probably be prepared on the trust basis; for this reason, it is better to hold the freehold in a separate company if the original landlord wants or has been required to transfer it.

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Service Charges Deemed to be held in Trust

The management company holds any money received in trust for the leaseholders. It is obliged to expend the money in accordance with the leaseholders obligations as specified in their lease. It simply acts as an agent for the leaseholders. Normally a managing agent is appointed by the directors, unless they want to act in that capacity themselves. 

The management company does not trade in its own right and it is normal to treat it as a dormant company and file accounts reflecting that status with Companies House.

I believe ACA and RICS affirm this treatment. I did a quick google but don't have the time to search for the explanatory  URL's right now. 

With the management companies I act as managing agent for I circulate to all the members an income and expenditure statement within 6 months of the year end. This is simply to show how the service charges collected from them have been spent. It is normal practice to collect monies in advance and to adjust for any surpluses or deficits the following year.  

Yes you are correct that the balance sheet for a company limited by guarantee is unlikely to have any assets or liabilities. For companies limited by shares the only assets usually held are the amounts subscribed by the members. Finally income tax is payable by the company on any interest received according to the rules for taxation of trusts.

 

 

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ARMA

Agree with lisler.

Have a look at ARMA's revised guide on all of this http://www.arma.org.uk/doc/public/LAN08-RMC-Accounts--10June10-.pdf and bookmark their site as it's a great "font".

Good luck

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Client's bank say I am talking rubbish!

I advised my client to open a trust account for the company, planning to switch to the new requirements before the next year end.  The bank told my client that they were unable to do this and that it was not necessary and that I was wrong.

Just waiting to find out who they spoke to and have a word with them....

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