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Service charge accounts

Have just read ICAEW technical release "Accounting for Service Charges", 01/10. Service charge monies in respect of variable service charges are subject to a statutory trust (s42 of LTA 1987).  This means that they must not treat service charge funds as belonging to the company.  As the transactions are not in the name of the Service Charge company the company will not have any figures to disclose and it will be dormant for the purposes of the C.A.  

The commercial property I am dealing with is not entirely occupied by tenants.  It is mostly occupied by the owners along with a couple of tenants.  Are the service charge monies collected from the occupiers/owners subject to a statutory trust?  If the answer is no, what accounting guidance can I refer to for help?  Would the management company have to open a bank account in its own name (if service charge monies are not to be hold in a trust) and have all transactions in its name and therefore VAT and CT returns would need to be done, along with filing annual accounts (which are not dormant!).

If the service charge monies are subject to a statutory trust, can the company register for VAT but at the same time file dormant company accounts?  

Hope someone can help!

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07th Oct 2011 08:26

Statutory Trust?

Out of interest,why do you think there is a stautory trust?By the way,there was a similar question posted here yesterday which answers your question.

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By Helen3
07th Oct 2011 11:24

Thanks but sadly the answer to a question posted yesterday doesn't answer my question.  Under s42 of the Landlord and Tenants Act 1987, service charge monies paid in respect of variable service charges are subject to a statutory trust.  Hence the "client monies" bank a/c.  

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Does the L&T Act apply?

Despite it being the case for years, there have actually been countless questions on this topic over the past year since the ICAEW's "revelation" opened people's eyes.

However I'm pretty sure that under S42 L&T Act the trust status of the money only applies to residential property, if yours are business lets then chances are the nature of the money is determined by the leases.

In many cases these days (and I have told clients to insist) tenants request that landlords & agents keep deposits & service charge monies in separate stakeholder type accounts with a written undertaking that they are held separate to the landlord's funds (or lack of them!).  In such cases therefore I would not account for them in the landlord's accounts.

Hope I got the right end of the stick

 

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By Helen3
07th Oct 2011 13:37

Your answer is really helpful, many thanks Paul.  Begs another question, I'm afraid. What would happen with registering for VAT?  If the SC management company registered then it would have transactions in its name and would then have to file accounts etc. 

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By johnt27
07th Oct 2011 13:13

History of business

If I remember rightly the ICAEW's guidance does state that despite there being a trust which should be seperately accounted for, company's won't be required to change their accounting policies and therefore treatment of income/monies held.

We had a similar situation with a client recently and they decided to continue to account for everything as they had done for the last 30 odd years as to change their accounts and supplement them with a set of trust accounts would confuse all the tenants!

This would mean you can approach this issue on a client by client issue, but should apply the guidance for new property management companies.

The guidance also mentions the issues regarding tax rates for companies and trusts not always being the same over the past few years. I wonder if HMRC might go fishing in this area?

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By Helen3
07th Oct 2011 13:43

Service Charge accounts

Thanks John.  More the reason to file dormant accounts.  The guide states that even if there some insignificant transactions in the accounts, HMRC will normally regard them as dormant for C/T purposes.

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07th Oct 2011 14:03

trust?
s.42 does not mention a statutory trust but instead a trust account.I do not know of any legiislation which deems this a statutory trust e.g.lpa 1925.

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Might be a legal question

Hi Helen - if this is a commercial property and there is nothing in leases to differentiate service charge money from anything else going through the company then it is likely that all money in & out of the company will be regarded as its own operations.

The imposition of VAT on service charges may well rely on the VATed nature of the property, I'm not an expert I'm afraid.

John - I have dealt with several S42 situations (blocks of flats etc) and there's no need to do trust accounts all you do is a trust tax return each year to declare any interest or other non-service charge earnings.

Yes, the old differentations in tax rates was a real problem at one time but to be entirely fair to HMRC they issued guidance on this oevr 10 years ago and regularly let things go as there was so much turning of blind eyes & ignorance in flat tenants and accountants' offices.  In a case I took over a couple of years ago the accountants had been ignoring this for 20 years and with £3K to £5K of interest being earned each year thye service charge account ended up with over £10K of tax to pay and 6 years of trust tax returns to do.

In most cases these days, property agents have taken care of this and open taxed deposit accounts to take care of the tax.

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