How should I account for a "contingency fund"?

Property management company service charge contingency fund

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I have recently taken on a property management company comprising of 8 houses. Each householder is a director of the company and they each pay a service charge into the company bank account annually, to pay for maintenance and repairs. I have drafted the income statement but it is currently showing as making a profit due to the sevice charge income, although the householders do not make a profit. I wondered if anybody had had an experience of this type of company and if so, how did you account for this? I contacted HMRC and they have said that they will treat the company as dormant as long as the profit remains around the same figure. The problem is, the householders pay in money annually so the pot will continue to build up gradually until the money is needed to fund any repairs or maintenance to the estate. Any help would be greatly appreciated.

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paddle steamer
By DJKL
22nd Jun 2017 14:12

Irrespective of what they do actually pay what are they legally obliged to pay?

If the overpaid sums are not allowed for/ envisaged/dealt with within the titles/property agreement/whatever, and are therefore potentially due to be refunded to the individuals if requested, treating as creditors would appear to deal with the issue re the excess amounts received.

The key is why do the extra amounts received arise in the first place.

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Replying to DJKL:
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By lauraratcliffe
22nd Jun 2017 14:39

Thank you for your reply. They are not legally obliged to pay anything but a solicitor has recommended to them to have a pot of money/ contingency fund in case of any necessary repairs to the road or fences etc. They have decided on an annual amount which will build up in the bank account until they need to pay out for anything like road/fence repairs. The householders will not receive any of the money back. I thought about treating as creditors but wasn't sure if that was the correct treatment as the amounts to be paid out are not guaranteed.

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By newstarter01
22nd Jun 2017 14:15

You dont show it as 'profit' but rather 'surplus'. Then you can call the 'accumulated profit reserve' a 'general' reserve or set up an additional specfic fund, eg 'tree maintenance fund'. You will need to amend the accounting policies too to describe what the reserves are used for. Have you had a look at ICAEW Tech 3/11. This might help.

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Replying to newstarter01:
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By lauraratcliffe
22nd Jun 2017 14:41

Thank you for your reply. I will take a look at that now.

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By andyjdicker
22nd Jun 2017 14:16

Are we talking about service charge accounts, or company accounts, as the two are often different.

If the company acts as an agent holding the assets on behalf of the members, then you could have a situation where company is completely dormant, but service charge accounts showing the income and expenditure are required.

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Replying to andyjdicker:
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By lauraratcliffe
22nd Jun 2017 14:47

Thank you for your reply. It is the company accounts I was talking about. The company was originally dormant, but then a bank account was created for the income/expenses which meant it was no longer dormant.

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By Mr_awol
22nd Jun 2017 15:39

OP read the tech release. It sounds like you are 'unfamiliar with' these types of accounts and likely to get them wrong.

Ive put a couple of pointers below. Once you've gone through those (and the tech release) then if you still end up with a surplus in the company it 'might' be possible to enter a provision for works to be carried out - again, depends on the leases and also what has been agreed and minuted by the directors....

lauraratcliffe wrote:

They are not legally obliged to pay anything .

Are you sure? Have you read the leases? This would be most unusual (to the extent that I doubt it is the case)

lauraratcliffe wrote:

It is the company accounts I was talking about. The company was originally dormant, but then a bank account was created for the income/expenses which meant it was no longer dormant.

It may have made it 'not dormant' but does that mean it had transactions in its own right, or was it just holding monies on behalf of the residents?

In any case was it actually 'dormant' before? When was the land conveyed?

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Replying to Mr_awol:
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By lauraratcliffe
29th Jun 2017 11:34

Thank you for your reply.
The housing estate is fairly new and was only built in 2012.
The directors/homeowners decided collectively to pay a "service charge" into a company bank account in case any repairs were needed for roads, borders etc. so that they didn't have to pay out a lump sum when the time came. Also, a solicitor recommended it in case someone decided to move house. Any prospective buyer would want to see that there is a contingency fund in place.
My original question was asking about how I account for this contingency fund, whether I have to show it as a profit.
The company was originally set up as "dormant" by the previous accountant because there were no transactions at that time. Since I took over, the company has had to pay utility charges relating to the build and ground rent to the freeholder.

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By Carl London
22nd Jun 2017 22:41

The company can be dormant but acting as agent with bank transactions (tick box on DCA)

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Euan's picture
By Euan MacLennan
29th Jun 2017 14:02

As the householders accept that they have an obligation to contribute to the communal expenses of the estate, this would appear to be a straightforward Residents' Management Company. You should be preparing service charge accounts in accordance with Tech 03/11 and dormant statutory company accounts.
Have a look at this current thread and this recent thread.

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