Residents Association Corp Tax

Residents Association Corp Tax

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I've recently been asked to take over my residents association accounts.  The association is set up as a limited company with all owners being shareholders, paying a monthly service charge into the business bank account.  I note that from the last few years, the company made a "profit" but did not pay corporation tax.  Do you know if residents association companies are exempt from corporation tax or I'm wondering if the accountant covered these profits with historic brought forward losses.  I have no experience of doing RA accounts (I'm a financial controller in financial services), do you think i'm biting off more than I can chew?  Any advice would be appreciated with these sorts of accounts!

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paddle steamer
By DJKL
21st Aug 2014 09:47

Have a look at guidance

http://www.hmrc.gov.uk/manuals/pimmanual/pim1070.htm

I would expect that only income arising from outwith the association would fall into the charge to  tax e.g. bank interest received.

The attached guidance appears to refer to England and Wales and property tenure/obligations re these countries. As I am in Scotland and have virtually no understanding of English/Welsh land tenure I will leave it to someone else to proffer more accurate advice.

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Euan's picture
By Euan MacLennan
21st Aug 2014 10:54

It is not a residents association

It is a residents management company, limited by shares, and you need to prepare small company accounts under the Companies Act 2006, the SCG(ADR) Regs. 2008 and the FRSSE 2008.

The argument about the need to prepare service charge accounts under the Landlord & Tenant Acts and whether the management company is acting as principal or as an agent for the residents (and hence, has nothing to put in its company accounts) has been rumbling on for years, not least on AWeb, but is finally getting close to resolution with the publication by the FRC of an exposure draft, FRED50, including proposed amendments to the FRSSE 2008, under which the company will prepare normal accounts, including all the transactions as principal, with one remaining fudge that the surplus (profit) from the service charges over the expenditure will only appear as a note.  As far as I know, the exposure draft has become somewhat stalled while they decide what to do with the FRSSE.  However, you would be ill advised to prepare the company's accounts on any other basis, except that I would continue to include the surplus and resulting bank balance on the face of the company accounts in order to give the residents the whole picture.

By concession, HMRC will treat resident management companies as dormant for tax purposes (no requirement to file a CT return), provided that they have no other income apart from interest up to £1,000 which is taxed at source.  This is based on the concept of mutual trading - a company cannot be considered to make a taxable profit out of transactions with its own members.

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By mjshort
21st Aug 2014 11:56

Which one?

As above is it one of the following:

1) a Residents Association (or Tenant Management) working for a Housing Association

Only taxed on interest income.

or

2) a Management Company for leaseholders within a Freehold?

Any 'profit' can be attributed to proposed expenditure or due back to Leaseholders as a rebate to get the profit to zero.

 

 

Either way maybe a small firm of Accountants doing some work might be the way forward for your Company.

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Replying to lionofludesch:
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By bluesian1210
22nd Aug 2014 09:03

Thanks mjshort - it's a management company for leaseholders within a freehold

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By bajones
21st Aug 2014 14:02

remember

Things to remember:

-It's not a business

-It's not trading; it's mutual trading

-The accounts need to be signed off by an independent qualified accountant

 

 

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By pawncob
21st Aug 2014 21:44

But

As Euan said, although you need to submit accounts to C.H., HMRC will allow the company to ignore the CT regime and no accounts or return needs to be submitted. You need HMRC's agreement for this so a letter and first year's accounts as evidence will be required.

You do NOT need the accounts to be signed off by an accountant.

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By bajones
22nd Aug 2014 08:56

Please see section 21 of L&TA 1985.

"In addition to the regular statement that must be provided under section 21 of the Landlord and  Tenant Act 1985, the landlord must also supply a certificate of a qualified accountant. This should state that in the accountant’s opinion, the statement of account deals fairly with the matters with which it is required to deal and is sufficiently supported by accounts, receipts and other documents which have been produced to them."

Assuming the service charge accounts have been amalgamated with the RMC accounts, this should therefore accompany the accounts.

I've seen this dozens of times; it's all very well doing it internally whilst all the lessees pay, but as soon as you get a non-payer moving in, you've got no leg to stand on in recovering the debt unless you have followed the letter of the law.

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By bajones
22nd Aug 2014 08:59

I should add

That if a schedule of costs and accountant's certificate is not provided, the lessee has the right to withold service charges.

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Replying to Vile Nortin Naipaan:
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By bluesian1210
22nd Aug 2014 09:05

Thank you all.  I'm starting

Thank you all.  I'm starting to think that I'll refuse the role as accountant and pass it onto a local firm.  However - I do have a practising certificate so hopefully that will help get around any of the issues of lessees withholding service charges.

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By pawncob
22nd Aug 2014 10:18

@bajones

 

I can't find that in s21 of the L&T Act 1985.

 

This is not a tenants association as defined by the Act, so that wouldn't apply anyway.

This is a management company.

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By bajones
22nd Aug 2014 12:31

Different wording, same story

Apologies, but that was the wording of s.152 of CLRA, which was due to replace s.21 LTA until it was abandoned by the Tories.

So the original s.21 is still in force, which says pretty much the same:

"(6) If the service charges in relation to which the costs are relevant costs as mentioned in subsection (1) are payable by the tenants of more than four dwellings, the summary shall be certified by a qualified accountant as:

(a) in his opinion a fair summary complying with the requirements of subsection (5), and

(b) being sufficiently supported by accounts, receipts and other documents which have been produced to him."

"Landlord" refers to any entity undertaking the reponsibilities of formal management, i.e. Freeholders, RMCs, RTMCs and Recognised Tenants Associations.

ICAEW and friends' Tech 03/11 puts everything nice and clearly, but does go beyond what is currently required.  LEASE will tell you the same thing.

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Euan's picture
By Euan MacLennan
22nd Aug 2014 14:57

Service charge accounts

Whilst bajones may be technically correct in saying that the LTA imposes an obligation to prepare service charge accounts on any entity collecting variable service charges under a legally enforceable contract, the legislation was intended to apply to landlords who were also managing the property on behalf of the tenants.  As such it often applies to commercial property which is rented, rather than bought leasehold, as is the case with most residential property.  It is absurd that a "Landlord" & Tenant Act can impose any obligations on an entity which does not own the freehold (or superior lease) and is therefore not in fact a landlord, particularly where that entity comprises all the tenants, and no-one but the tenants, who have chosen to delegate their rights and obligations to that entity.  Although Tech 03/11 sets out the guidance on service charge accounts, it was issued nearly 3 years ago and now needs to be reviewed in the light of FRED50.

As I indicated in my earlier comment, there are adherents to the cause of always preparing both service charge and limited company accounts, sometimes dormant.  In most circumstances of residents management companies, this duplication is overkill involving additional accountancy fees and is confusing to the leaseholders concerned.  There are also many of us who prepare just full company accounts and not bother with separate service charge accounts giving exactly the same information.  We prepare accounts for hundreds of resident management companies on this basis.  I suggest that you follow the same policy.

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By bajones
22nd Aug 2014 17:31

I agree with Fred

I largely agree with FRED50 and that Tech 03/11 needs to be updated accordingly.  As far as I know though, commercial property is outside the scope and is instead covered by the RICS code.

I do however think that anyone collecting (often quite substantial) funds from lessees, whether they are absent landlords or just a group of lessees, need to be accountable to those they are holding funds on behalf of.  A qualified accountant's certificate provides some assurance that there is no "funny business", and Tech 03/11 provides a work programme for an accountant to adhere to.

If I was collecting my neighbours' money I would want to be beyond reproach.

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By giddoh
11th Mar 2016 10:39

Re: RA Accounts

Thank you guys for your explanation. 

Much appreciated

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