Service charges on a Friday aftenoon-its no joke!

Service charges on a Friday aftenoon-its no joke!

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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 !

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Teignmouth
By Paul Scholes
28th Oct 2011 16:51

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.

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
28th Oct 2011 17:07

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.

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By uktaxpal
28th Oct 2011 18:18

Hansard

Interestingly,Baroness Scotland in response to a written question replied section 42 LTA 87 would not apply to commonhold companies as the the Directors already were bound by fiduciary duties.

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Teignmouth
By Paul Scholes
29th Oct 2011 16:03

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.

 

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By uktaxpal
31st Oct 2011 07:24

Woolley language.

@PS-definition of landlord is LTA 8/87 definition i.e. any entity which can demand service charges,so covers RMC etc and corporate landlords.

The term stautory trust is misleading as there is no trust as confirmed by counsel..There could be an implied,resulting,constructive trust in the case of reserve funds etc where amounts can be traced to particular leaseholders.

In 1.2.1 the word belong is used.I take this to mean both legal and beneficial interests.No distinction is made between RMC etc own accounts where the bank account has been arranged by the RMC itself and agents client account where one bank acount may be used to hold a number of RMC etc maintenance funds.In the latter case it may be correct not to include bank account account but instead to include an item such as Balance held by agent.I think the section is therefore incorrect.

I think the working party assumes all RMC etc will use agents client accounts which is not the case and then try to justify dispensing with statutory accounts by the use of flawed logic.The RMC etc objects clause will usually be to maintain or provide services to the leaseholders.The RMC etc can sue and be sued in its own name.It has a separate leagal existence.Agents clients accounts may not belong or be in the name of RMCs etc but I cannot see how both the legal and beneficial interests cannot be held by RMCs etc and therefore pass BOTH the substance and legal form arguments.Therefore,transactions should be reported in stat accounts I would like to see the contrary argument and related reasoning.

There will obviously be questions from clients about why the service charge accounts and stat accounts differ (due to non service charge items).A solution would be include four columns on stat. P&L and BS,Non service charge items,service charge items,Total and comparatives).

The factsheet does not have statutory authority.Perhaps Parliament could legislate and update the CLRA 2002 and LTA 85/87 to utilise Stat.accounts and the four column method above and dispense with the two tieir system at present i.e. service charge accounts and stat.accounts.

 

 

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Teignmouth
By Paul Scholes
31st Oct 2011 10:22

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.

.

 

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By uktaxpal
31st Oct 2011 12:02

Opening balances

There is another point to consider.In the case of a RMC etc which has non-service charge income/expense,how are the opening balanes to be allocated to service charge accounts?

@PS Your normal definition is extended by the LTA to include entities which have a right to demand service charges.So therefore you could hve a building company which owns the freehold but there is also a RMC which has the right to demand servce charges.

Substitute pool of money for trust as per cousels definition.

There are statutory trusts which are lrgal trusts but this does not include section 42.

Sorry I used a double negative.I believe the RMC etc does have the legal and beneficial interest in maintenance funds whether held in an agents client account or in a RMC etc bank account.Section 42 does not apply to freehold owning RMCs.Therefore,the transactions satisfy the substance over legal form argument and should be reported in RMC stat.accounts.

As there is no requirement to issue regular service charge accounts in any particular format have you always issued service charge accounts in the last twenty years including a balance sheet and issued dormant stat.accounts?

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Teignmouth
By Paul Scholes
01st Nov 2011 23:23

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".

 

 

 

 

 

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By uktaxpal
02nd Nov 2011 11:48

?

@PS

 

Both Counsel (point 1) and Baroness Scotland have stated S.42 would not apply in the case of freehold owning RMCs etc.

Where the lease and articles of assoc. state stat.a/cs should be used then service charge accounts are unnecessary.

As the RMC has control over service charges it therefore has benefical interest.

I think the way forward is to amend LTA and use stat.a/cs and the four column method.Keep it simples !

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Teignmouth
By Paul Scholes
02nd Nov 2011 20:36

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

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By uktaxpal
03rd Nov 2011 09:14

You lucky XXXXXXXXXX

@PS  Just think of those you are going to leave behind !

The guidance has to deal with RMCs,RTM,Commonhold,Deed,For profit Landlords,local authority housing and retirement housing and the implications of employing an agent.The guidance probably  needs to be more explicit and explain in each of those situations the recommended practice and the reasons why.

 

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By uktaxpal
13th Jun 2012 15:44

PROPOSED UITF published 10.5.12

The UITF is only proposed.It is obviously experiencing difficulty with service charges!

 

 

 

 

http://www.frc.org.uk/images/uploaded/documents/UITF%20Information%20Sheet%2092.pdf 

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