ACCA technical factsheet 172 details new guidance on residential service charge accounts.
However,the important issue of whether RMC transactions should be reported in companies act RMC accounts has been referred to a UITF,yet to report.
Counsel has clarified that a s.42 LTA 87 account is not a Trust (separate organisation) but just a pool of money.Thats a relief!
But overall,there is still confusion !
Replies (12)
Please login or register to join the discussion.
Just what I needed @ home-time Friday
Thanks for picking this up uktp, wondered when the ACCA would get their finger out.
Will have a read though with my Sunday papers but I can't see any significant changes in best practice on page 2, ie that the monies paid by tenants are trust monies and should not be recorded in the accounts of the owning or managing company. These two aspects have been the main bone of contention on AccWeb.
Have we been here before?
I share your enthusiasm for this topic, Paul. Am I correct in assuming that this is the ACCA response to HMRC's new guidance and equivalent to the ICAEW's 01/10 technical note that we grappled with in July-August? And if so, are there any nuances or differences in the documents that are worth highlighting?
Although I groaned when I saw this post (I've still got a big backlog to work through from my holiday), I appreciate uktaxpal bringing it to our attention - and the comment about it being referred to the UITF. This might add a few more months to the timetable, but should at least produce some authoritative guidance.
Give me strength
Decided to enjoy my Sunday morning so hit this today.
The good news I suppose is that this is a joint release by the main accounting bodies & the two main "industry" bodies RICS & ARMA. The bad news is that they seem to have bottled it by leaving a key area of confusion (for me anyway) in section 1.2 (pages 4/5) headed up:
Landlord Company Statutory Accounts.
1.2.1 states that if the Residents Management Company (RMC) or the Right to Manage Company (RTMC) are also the landlord then the s.charge monies are held in (S42) trust and so should not included in the balance sheet of the RMC or RTMC. This has always been the case (and the debate over whether there should be a separate trust bank account or not is a side issue).
1.2.2 highlights a new (for me) "debate" surrounding the accounting for the s.charge transactions in the statutory P&Ls of the RMC/RTMC & Landlords accounts. Which immediately made we wonder:
a. If the trust money is excluded from the balance sheet what is the justification for reporting any of its transactions in the P&L?" and
b. If the bank balance is excluded from the balance sheet how on earth do you do the bookkeeping to reflect transactions in the P&L (the debits & credits only work if income=expenditure)?
1.2.3 expands on 1.2.2 by saying that if the transactions are included in the P&L of the RMC/RTMC then the account should reflect their "economic substance". To my mind, given that the money funding the transactions does not belong to the company how can there be any economic substance to the corporate entity?
It also makes reference to preparing the P&L in accordance with Sch 1 to the applicable Accounts & Reports regulations. I'm lazy does anyone know what/where these are, I need to know for my CPD!?
1.2.4 says that the question of whether the transactions should be included in the landlord company's P&L has been referred to the UITF (bunch of chickens).
I have to keep reminding myself that this section refers to the accounts of the landlord. 1.2.1 confirms this, 1.2.2 & 1.2.3 tend to drift away from "landlord" but then 1.2.4 returns to it.
So it seems to be saying that the "debate" surrounds the accounts of a corporate landlord rather than cases of RMCs or RTMCs who are not the landlord (except, reading it again 1.2.2 seems to include them when separate to the landlord?).
I'm hoping that, being once removed from the landlord, these disinterested companies are merely acting as agents and many, like landlords themselves, will appoint managing agents to handle all the money. In such circumstances therefore, like managing agents, none of these transactions or bank balances touch their accounts at all, but then, as I say, 1.2.2 refers to them as separate from the landlord.
Sorry to be so long winded but it would be great to know if others have the same take/confusion on 1.2. I'm still lost on whether this section relates only to landlord accounts.
The rest of the document is good and I'm pleased to see straight forward service charge accounts, engagement letters, letter of rep and even work programmes.
uktp
You quote the LTA definition of "Landlord" and this is also referred to at the end of the document's definition in 1.3 but it starts that section by defining Landlord as most people would understand it, ie the person or company which owns the property. So part of my confusion I think may be around which definition the document is using. Unfortunately, if pushed, I may have to read it all again!
I find the absence of a trust hard to accept given the use of the word throughout this and every other document I've ever read on the subject. I am no expert and so there may be a difference between "Statutory" trust and a common or garden trust but, as I say, it has always made sense to me that the money is being held "in trust".
So, because the money is held in trust, I agree with your point that the money does not " belong" to the RMC (or anyone else holding it), in either legal or beneficial terms. As I said though the debate over whether separate designated, trust or "client" bank accounts should be used is a side issue. It may not be best practice, and I'm sure there may be laws that can be broken, but if money is held in trust, it is held in trust, wherever it's placed.
I don't see the conflict between the"objects" and legal responsibilities of the RMC and the principle that the money does not belong to it. A bank contracts with me to hold & look after my money properly and I can sue it for not doing so, doesn't mean it has to show my balance or transactions in its own accounts.
Finally, you say there will obviously be questions from the clients about the differentiation of monies. I have to say, in 20 years of dealing with service charge accounts, there never has been with my clients. Maybe I've been lucky but I've yet to see a lease that says that the annual service charge accounts need to show anything other than the service charge collections and expenditure, so to my mind, the moment the company (who quite often is also the actual landlord) wishes to do something for itself these extra transactions create the need for entries in the company's accounts, until then, it's dormant or merely shows ground rent income and a bit of accountancy.
.
.
uktp
Hi - after a sobering Monday/Tuesday at the grindstone I feel a little more down to earth over this...I think? I'll take each of your paras above in turn:
RMC's opening balances:
I'm assuming you refer to a case where the RMC has never differentiated its own money from s.char money and is suddenly faced with the situation that it is required to do so. Obviously, if a memorandum type set of s.ch accounts has been prepared each year under the terms of the lease you'd go back over all of them work out total collections less total expenditure and arrive at a notional s.ch bank balance (+ & - debtors/creditors) at the previous year end and remove these from the bank balance (debtors & creditors) and P&L on day one of the new year, explaining the entry in the accounts.
Alternatively, if you had just relied on the RMC accounts as satisfying the requirement to keep track of s.ch collections & expenditure since the inception of the leases then an easier way I suppose would be to add up all the non-s.charge income & expenditure over the years which would give you the company's net assets at the start of the year and so, by deduction, the other net assets in the balance sheet belonged to the s.char balance sheet, and would be removed, as above.
If the lease was so old or records inadequate then the leaseholders and directors/managers of the RMC (if separate) would work out a reasonable estimate of the split.
Builder & RMC:
Yes, I agree and have had this situation myself, the primary issue is who is the payee under the terms of the lease as this is the person or entity who holds the money in trust under S42.
RMC's beneficial interest in the money:
Afraid not. If the RMC is the payee then S42 applies and those finds are held and handled by the RMC as a trustee and not as beneficial owner.
S42 does not apply to freehold owning RMC's:
If the freehold you refer to is the residential property within which leaseholders have leases that require them to pay their variable s.chs to the RMC then S42 does apply to the RMC. As I said, it's the payee who is caught by S42.
No legal requirement to issue regular s.ch accounts in any particular format:
Depends on the lease doesn't it? In the two main cases I deal with today (both freeholder management companies) the leases on one require a statement of income and expenditure to be presented each year and the other one requires an income & expenditure account and balance sheet. The latter is a more modern lease.
In other cases I have dealt with the leases have been pretty useless on the matter leaving it to the best practice of the managing agents and/or accountants to prepare statements that meant something to the leaseholders and so, yes, I have always prepared I&E & Balance Sheets although, in earlier years, the accruals basis was lax and so the balance sheet tended to be a bank balance, a debtor for any late payers and an accrual for our fees (even if the lease required just a *receipts & payments" account).
Since the 1985/87 acts put this sort of stuff in place it's been for agents/accountants and their regulatory bodies to come up with best practice to make it work on the ground. All regulatory bodies issued guidance on the the "trust" basis of service charge accounting years ago but it wasn't given the publicity it deserved. I've got to say however that what did get a few people sweating, was IR's guidance in 1998 in Tax Bulletin 37, this acknowledged the previous confusion but made it clear that the IR would impose trust rates of tax on any investment income generated within service charge monies.
So bringing this all up to date with some simple and straightforward rules is "better late than never".
Amend LTA
On that we agree but I'm not holding my breath. Given that 2002 act has not been given the attention it deserved and the amount of time already spent by the reg bodies I think it will be left to them & legal counsel (shame) to come up with best practice.
The only silver lining is that by the time they do I'll be out of it, my sentence is nearly up!
Cheers