Management Charges

Management Charges

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Hello

I have taken on my first client who has a group of companies.

The accounts I am doing are for his UK company which owns 100% of the shares in a company he has set up in Bulgaria.

When going through the expenses, I queried the Bulgarian receipts as these clearly relate to his Bulgarian company, but he said that as the company is managed and owned by the UK company he will be charging them to the UK company.

a. Is this correct?

b. If so, would they be classed as management charges? I was reading about management charges and see that you can apply a 5% uplift.

c. Am I barking up the wrong tree entirely? 

Thanks in advance

Replies (5)

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By eastangliantaxadvisor
23rd Sep 2012 21:04

Where did you get the 5% uplift from? That is news to me!!

 

The normal rules apply to maangment charges, they need to meet the

Wholly & exclusively tests, like any other expense?

 

You would need to be able to justify them - do they relate to this copmany - and what mamangment does the other company undertake?

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By LeighM
23rd Sep 2012 21:56

...had a good look and I cannot find the 5% uplift info now. I was reading about a court ruling where a company had charged excessive management charges, and it was decided that the actual costs plus a '5% uplift' was considered acceptable. If I ever find it again I will send you the link.

Re my client, I am just thinking it through:

He has incurred expenses, flights, hotel accommodation, subsistence (in Bulgaria), and charged this to the parent company instead of the Bulgarian company, as he said that as the parent company manages the Bulgarian company, that is what he will do.

I suppose only if he re charges the expense to the Bulgarian company it becomes a management charge?

If he does not re charge, is it correct to put it in the parent company accounts under the rule that the UK company is the parent and manages the Bulgarian company?

It just does not feel right to me but I have no experience in preparing accounts where there is other companies in the group.

Thanks for your response

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By cparker87
23rd Sep 2012 22:57

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Bit of a nasty one to cut your teeth on. From an accounting perspective I suppose it depends on which hat he is wearing when he is in Bulgaria. What is the reason for the Bulgarian Company? Are those costs in reference to that Company's activities? Are those costs incurred in the course of duty for the Parent Company's business and so chargeable and extractable from the Parent?

Regarding an uplift I expect that the 5% will be in regard admin. Fees associated with recharging.

Aside from that you need to decide which is the most to efficient mechanism bearing in mind potential Bulgaria ITEPA equivalents etc.

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By duncanphilpstate
25th Sep 2012 12:51

As cparker87 said, it depends what hat he is wearing for the trips to Bulgaria. On the whole though I would think that if it is as director of the parent, then it would be reasonably classed as governance from/by the parent company and part of its costs as normal reimbursed expenses.

If what he's doing over there is actually advancing the business of the Bulgarian subsidiary, then perhaps these should be accounted for directly in the BG sub. However, as he is presumably employed by the UK company and not the BG company, there might be complications raised (eg Bulgarian tax issues?) if he's reimbursed by or has costs settled by the BG company.

In my view, there is only a "management charge" if the UK company charges some/all of these costs back to the subsidiary. It would be sensible to be able to substantiate the basis of these charges and the benefit the company gets from the implied services, in order to avoid challenges by the BG authorities to local tax deductability etc. He doesn't want to appear to simply be extracting cash on arbitrary grounds.

As regards an uplift, I think you can get away with this sometimes, if it can be seen as adding value (eg management/advisory expertise). However I'm not sure about the 5% being an accepted rule. Most sensible to clear any intended percentage with the tax authorities at each end before applying it. And look out in case the Bulgarian end sulk at it or try to apply a withholding by misunderstanding the nature of the charge.

On a slightly different tack, if the UK company pays bills on behalf of the Bulgarian business if it doesn't have much cash, then you'd be establishing a current account between the two companies and debiting the UK's payments into that account, with BG booking invoices into its P&L and crediting against theoir end of the current account.

Good luck and welcome to the minefield!

Duncan

 

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By LeighM
01st Oct 2012 20:46

Thanks Duncan...that's clarified things a lot for me. Very much appreciated.

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