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Agent v Principal - Income recognition

Property management company providing live-in guardian services

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A new client has set up a company to manage vacant/derelict commercial properties on behalf of landlords by way of "live-in guardians". The tenants are given licence to occupy converted units in the properties at a discounted rate (vs normal rents for the areas), and the client company is responsible for collecting the income from the tenants and meeting all costs for upkeep/maintenance/utilities etc. Any residue is then split on an equitable basis with the landlord.

Activity in the first period of accounts looks to be fairly nominal as the property was not in a safe condition, but it is now almost fully tenanted and monthly income is approaching £6K. The client is also looking to expand the portfolio of properties under management rapidly which would mean monthly collections could be over £10K in the near future.

There is currently no formal agreement between the client company and the landlord, just some emails indicating the client company is responsible for meeting all costs relating to the upkeep of the property, and that any surplus after costs is to be split 50/50 (a legal agreement is now in the process of being drawn up which will essentially state this to be the arrangement).

I'm trying to establish what to recognise as the company's turnover in the accounts as it seems to be a different scenario from a conventional property management company working on a commission basis. In this case, the client company seems to be acting as principal in setting/collecting income from the tenants, especially as the licence agreements are directly between the client company and the individual tenants (ie. the landlord is not party to these).

I'm leaning towards showing the gross amounts receivable as being the turnover of the company, and then treating the maintenance/upkeep, and residual payments to the landlord as direct costs. I would welcome input on the proposed treatment. The scenario has changed from how it was originally described by the client during the initial discussions, and having now gone through the entries/paperwork (and lack, thereof), I've confused myself in how best to approach it. As a corollary, can I assume the income is exempt from VAT under the provisions of VAT Act 1994, Schedule 9, Group 1?

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15th May 2019 10:40

From what you describe, it does seem that the company acts as principal when it lets to guardians. However, I would wait until you have the legal agreements which will confirm the relationships.

In particular, what it the legal basis on which the management company lets to guardians? There must be some kind of license between the landlord and the management company - otherwise they have no interest in the property and cannot allow the guardians to occupy.

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By DJKL
15th May 2019 12:02

I am presuming the end tenancies are for residential use, if not this is not on point

However if it is on point how does your client get around the safety issues of letting a commercial property to various residential tenants for residential use or has there been a formal conversion in accord with planning/building control requirements?

Are there in place occupation certificates for residential use?

Is this akin to large HMOs?

Is this akin to a larger hostel with all the planning/warrant implications this might bring re safety/ fire corridors/ doors/sprinklers /alarms etc?

What about insurance ?

If poor attention to detail re what is going on then in the event of something unfortunate happening your client may be very firmly in the firing line re culpability, appreciate outwith accountant's role to talk to clients re these matters but if you think your client is the type that cuts corners (as lack of extant paperwork at present suggests) you possibly ought to flag with him the dangers if he has not dotted all the i's and crossed all the t's

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15th May 2019 14:23

Thanks for the feedback, Having spoken further to the client:

- the current building was previously a care home which has been converted to individual residential units under an HMO licence with the local authority (the HMO permit is issued to the client company).
- planning considerations and health and safety has been signed off by the local authority and the client has liability insurance in place.
- he has dug out the initial agreement with the landlord which is a rolling 3-month licence to occupy the site and manage it on behalf of the landlord (which has now been in effect for over 10 months).

The licence agreement with the landlord makes reference to fixed monthly payments which are far in excess of the actual payments made. The client says he has a lengthy email chain with the landlord outlining unforseen costs and issues to get the property to an inhabitable state, in which the landlord accepts the lower payments actually made. Going forward, there will be a formal agreement which will be at a reduced fixed monthly payment to the landlord.

Given there will be a fixed payment specified in the agreement, I will treat the client company as being the Principal in respect of rents receivable, treat these as the company's turnover.

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15th May 2019 15:49

Thanks for coming back with feedback. Agree with your interpretation that the income is earned as principal.

Sounds like the client is behaving correctly and the matters raised do not give cause for concern.

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