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Flat management companies

Flat management companies

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I have recently had a question from a director of a flat management company that we deal with, and this prompted me to look through Accounting Web and HMRC website on the subject of flat management companies - how to prepare their Accounts and how to tax them?

Our Firm prepares many flat management company Accounts.  We prepare the Accounts with a P&L and Balance Sheet, with Service Charge receipts and expenses going in the P&L.  As for the tax, none earn sufficient interest in order to pay tax and are treated as non-taxable on service charge surplus/deficit as are mutual trading.  Some of these companies have over the years been asked to send Accounts to HMRC, but the reply has always come back "there is no need for this company to prepare a CT600 each year, unless its interest receipts exceed a certain level".

The director's recent question was along the lines of "I have read that my company's Accounts should be prepared as dormant, the bank account and service charges should be treated as a Trust outside of the company, and the company should be preparing Trust tax Returns not corporation tax returns - why aren't we doing this?  Also, separate service charge schedules need to be prepared and added to the Accounts that go to Companies House."

As I said, I have read through Accounting Web and HMRC website and found many articles, but no definitive answers.  As for the Accounts - the Flat Management Company booklet on the Companies House website says that "many companies choose to include the income and expenses in their Accounts".  This implies that there is a choice.  I can't find anything concerning the need for including separate service charge schedules in the Companies House Accounts. HMRC website talks about "if you are within Landlord & Tenant Act then the Trust rules apply", but doesn't really define when you are within LTA.  Also, as I mentioned, HMRC have seen many of our companies' Accounts, but not once have they mentioned the need for Trust Returns.

Can anyone please give me a definitive answer, or point me in the right direction?

Replies (23)

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By accountright
26th Jul 2011 22:38

Trusts and Estates

See page 4 of the attached news letter

http://www.hmrc.gov.uk/cto/tep-newsletter12-10.pdf

Regards

Polly

 

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By uktaxpal
27th Jul 2011 11:03

Principles

1/Dormant company = "any company which has no tranactions which need to be recorded in the books of account"

2/Trust(Legal meaning) = Properly constituted i.e. has a settlor,beneficiary and is properly witnessed.

3/S42 L&T87 trust= 

42 Service charge contributions to be held in trust.E+W

 

(1)This section applies where the tenants of two or more dwellings may be required under the terms of their leases to contribute to the same costs by the payment of service charges; and in this section—

“the contributing tenants” means those tenants;

“the payee” means the landlord or other person to whom any such charges are payable by those tenants under the terms of their leases;

“relevant service charges” means any such charges;

“service charge” has the meaning given by section 18(1) of the 1985 Act, except that it does not include a service charge payable by the tenant of a dwelling the rent of which is registered under Part IV of the M1Rent Act 1977, unless the amount registered is, in pursuance of section 71(4) of that Act, entered as a variable amount;

“tenant” does not include a tenant of an exempt landlord; and

“trust fund” means the fund, or (as the case may be) any of the funds, mentioned in subsection (2) below.

 

(2)Any sums paid to the payee by the contributing tenants by way of relevant service charges, and any investments representing those sums, shall (together with any income accruing thereon) be held by the payee either as a single fund or, if he thinks fit, in two or more separate funds.

Therefore,a legal trust does not exist and a Trust and Estates return is not required unless a properly consituted trust exists.

Service charge accounts are a seperate exercise and it is important to comply with the provisions of L&T1987 etc re:serving those accounts on leaseholders.SC accounts should NOT be filed at companies house.

It may be wise to network with an ARMA member.

 

 

 

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By shenker
27th Jul 2011 11:10

ICAEW

If you are a member look at Tech Release 1/10

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By uktaxpal
27th Jul 2011 11:15

Law over-ride ?

The tech release does not comply with the law !

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By colinwain
27th Jul 2011 11:42

Commencement date

Thanks everyone for their helpful replies.  I have been looking at Tech 01/10 and coming to the conclusion that we need to change the Accounts for our flat management companies (with prior year adjustments).  What I can't find anywhere is - was Tech 01/10 ever finalised or amended?  The version of it I found says it was proposed guidance, subject to comments.  If it was finalised, what accounting periods is it applicable from?

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By uktaxpal
27th Jul 2011 12:18

2 sets of accounts required ?

What if the company has other income say ground rents out of which are paid non service chargeable costs.These should not appear in L & T 1987 service charge accounts

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By matto763
27th Jul 2011 12:36

It's complicated

I know that this is an area that the ICAEW Technical helpline gets many, many queries on, especially as many of the companies have a retired accountant tenant to do the books.

The law on how the accounts should have been prepared was supposed to change at some point over the last three years but has now been shelved.

The accounts issue is made difficult because the members should get service charge accounts but the accounts to be filed at Companies' House are dormant and the accounting software packages are, understandably, not geared up for this.  We have ended up producing accounts in Word using the Technical Release  for guidance, which is a bit of a throwback to a bygone era and unsatisfactory for so many reasons but got the job done.

I also looked at an online training seminar from Smart Training Group on the subject and it was quite a helpful introduction.

 

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Euan's picture
By Euan MacLennan
27th Jul 2011 14:02

More comments

Have a look through this recent Flat management companies and ICAEW Tech release 1/10 thread.

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By colinwain
27th Jul 2011 15:06

Thanks.  I should have noticed this other thread (as I should have noticed Tech 01/10!!).  It looks then like I can tell our clients that we can carry on preparing Accounts in the old way, until such time as ICAEW issue definitive, final guidance.

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By uktaxpal
27th Jul 2011 15:20

IDEA !

On the non-statutory P&La/c you could have 3 cols-Total /Service chargeable /non-service chargeable

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By uktaxpal
27th Jul 2011 21:02

Update

Accounting Regulations and Commonhold reform abandoned by Coalition Government

The FPRA understands from the Department of Communities and Local Government (DCLG) that it will not be implementing regulations requiring service charge accounts to be held in designated accounts, and for certain accounting information to be provided with service charge invoices.
 

These provisions were included in the 2002 Commonhold and Leasehold Reform Act, but not yet iimplemented. The Coalition government has abandoned them on the grounds that they will be an unwanted bureacratic burden on businesses.

The Ministry of Justice has informed the FPRA that it has no plans to change Commonhold legislation, while adding that subject to priorities and resources it will consider proposals for change.

A further signal that the Coalition has turned its back on Commonhold is their withdrawal of funding from LEASE to provide advice on Commonhold. See LEASE's press release for more information.
Posted 5/08/10

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Teignmouth
By Paul Scholes
27th Jul 2011 23:19

Yes but....

Much of this topic has been discussed in the thread Euan refers to above however the unresolved bits of the C&LR Act 2002 referred to above have nothing to do with the issue of where to account for variable service charge monies.

The debated and now dormant bits of the 2002 act are as follows:

S152 deals with the requirement to prepare regular service charge accounts and was proposed because, if the lease was silent, the the existing law (S21 1985 act) only required a summary of service share costs to be prepared if the leaseholders formally requested it.  Obviously over the years new leases and best practice had resulted in regular annual accounts to be prepared and so the 2002 act sought to codify that.

S156 deals with the requirement to hold the S/Ch monies in separate designated accounts (as is the practice of all property managing agents).

So the above sections are only a natural development of the existing (then and now) law set out in S42 of the L&T Act 1987 that variable service charge monies are held in trust for the tenants.  

It has always been the case that if money is held in trust, whether by a person, company, agent or Martian it has nothing to do with the accounts of the holder.

This whole fresh discussion has come about because someone spotted the ICAEW's guidance from last year but, way back in 2007/2008 when the above sections from the 2002 Act was looking likely to come into play, there was a similar debate and guidance issued by the regulatory bodies (accounting and property management). I quote from the ICAEW's version then:

The key point to bear in mind is that the management company does not 'own' the transactions relating to service charge expenditure and the collection of monies from the leaseholders/tenants, because under S.42 of LTA1987 service charges are regarded as trust funds. The cash at bank does not belong to the company because it is held on trust for the leaseholders. The only items/transactions that belong to the company are non service charge transactions such as ground rent if the company owns the freehold. Non service charge items such as ground rent do belong to the company (if it owns the freehold, and is not collecting the rent on behalf of a superior landlord).

So, as pointed out in the other thread, none of this is new, it's been around since the 1987 Act and, more relevant, was dealt with by the Revenue (after all sorts of confusion) in the guidance they issued in 1998.

The problem is that there is nobody policing this and so many firms carry on pumping trust money through management company accounts because that's the way they did it last year.

My concern is that we are paid to help clients comply with the law and best practice (and the leases...anybody read those?) and so the moment we start turning a blind eye because the client is none the wiser and who is going to check anyway, we weaken our status but, as discovered by Colin, clients can read.

 

 

 

 

 

 

 

 

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By zarathustra
28th Jul 2011 00:56

Gordon Bennet !

I started the other thread, and I'm still undecided about what to do !

My thought is to account for the service charges separatley, and do dormant accounts!

 

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By uktaxpal
28th Jul 2011 07:35

Main issue

P&La/cs submitted to leaseholders under LTA 1987 should not include costs which are not included in the lease terms.The answer as stated above may be to have three cols on the p&La/c -Total/service chargeable/non-service chargeable.

Trust in this context is just a loose term-there is no trust !Just as the NHS Trust is not an actual Trust.

 

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By colinwain
28th Jul 2011 09:45

Yes but no but

I have now spoken to a property managing agent about this subject.  He takes a relaxed view, and says that it depends on the tenant's wishes.  Some of his companies' tenants think (quite rightly) that it is a nonsense that the Company's Accounts contain no figures, and prefer the service charges, income and costs and bank account to be included.

I fail to see why including the bank account, and then having either a corresponding creditor of "amounts due back to tenants" or a Tenants' Reserve Fund with that amount in, is anything but substance over form. 

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By uktaxpal
28th Jul 2011 10:33

Dustbin

I dont think the working party re:tech rls did a good job !

 

Anyway,the tech rls has been filed in the dustbin as a result of the CLG pronouncement on the future implementation of CLRA 2002

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By zarathustra
28th Jul 2011 10:38

We are losing site of something

Paul, I agree with your last answer. However whatabout the situation where there is no managing agent as such. The leaseholders (also collectively the freeholder with a different hat on), agree everything between them, and sort out maintenance issues. The property rquires work not allowed for in the lease. Surely they each just increase their service charge accordingly.

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By uktaxpal
28th Jul 2011 10:43

No

Technically,the FMC or RNC would need to have other income say ground rents out of which to pay non service chargeable items.

If this is not possible the RMC or FMC should vary the lease.

Practically,the leaseholders need to maintain the buildings etc

 

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By trecar
01st Aug 2011 12:09

Keep it simples!

 I prepare seperate accounts, one to show the position with regard to leaseholders transactions and the other to show the position with regard to company transactions. I find it is a good guide to go back to the lease for an idea on inclusions for the lessees accounts.

The resulting solution tends to make abbreviated statutory accounts for Companies House fairly straight forward and the full accounts are simple as well. The lessees accounts can then show the position with regard to the management explicitly and often require very little or no explanation apart from that included in any covering letter.

Any income shown in the company accounts such as ground rents or interest are usually low and are covered by fees for the preparation of the statutory accounts and so do not generate any taxable income.

I find time spent is minimal and this often helps because of time constraints when it comes to filings. An example is, a client left a phone message on Friday regarding information for accounts that needed to be filed by Sunday. I turned everything round within a couple of hours and met the deadline. I'm tidying up the file now!

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Euan's picture
By Euan MacLennan
01st Aug 2011 13:11

Not so simple

... if you are preparing two sets of accounts instead of one.

We prepare accounts for a lot of residents management companies and not one is also the freeholder, so the statutory accounts would almost always be dormant.  In the few cases where the leaseholders have bought the freehold, a separate company has been set up, not least because not all of the leaseholders wanted to contribute to the cost of the freehold.

Trecar, may I ask what software you use to prepare the statutory accounts and the (lessee) service charge accounts?  We use IRIS for statutory accounts.  Although they are the major supplier in the market, they see no need to offer a template (chart of accounts and specialised report) to enable users to produce both sets of accounts simultaneously.  Until they do, we are extremely reluctant to take the time and trouble to produce separate service charge accounts in a spreadsheet format, so we will probably continue to produce a single set of statutory accounts containing the service charge transactions.  It gives the leaseholders all the information they need.

I find the trust argument less than compelling.  The leaseholders have set up the RMC for the sole purpose of handling the service charge transactions.  They own it and they trust it to do that job.  There is no landlord involved, so why should legislation in the Landlord & Tenant Acts apply?  It is a bit like mutual trading which cannot give rise to a tax liability.

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By tringyokel
02nd Aug 2011 15:56

I'm confused

 I have never submitted dormant accounts to Companies House for the management companies I deal with.  I hadn't thought of this trust complication.

Does it make any difference that in all these companies all the freeholders or leaseholders are also shareholders of the company?  Where I deal with leasehold flats this is a requirement of the lease.  With freeholders this is a requirement of the original transfer documentation.  So So the tenants/owners are the same as the shareholders anyway.

For what it's worth I produce abbreviated accounts using Sage APA.  In posting these all the income and expenditure is posted to one account.  The management figures are not needed for the abbreviated accounts.

I have accounts for the shareholders in a word document which has the detailed information in.  It takes about 15 minutes to update this every year.  Of course they pass a resolution to do away with the statutory accounts.

I think I may have to do more reading on this subject.

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By frauke
02nd Aug 2011 17:25

Keep it simple

Instead of P/L I provide Service charge statements - which always end with a 0 (zero) balance. 

This means any excess of Service Charges received over expenditure is either put into specific reserve funds (e.g. Maintenance reserve) or I refund the excess on the last day of the financial year to the leaseholders.   Company house does not get a copy of this.

 

 

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By uktaxpal
03rd Aug 2011 18:28

no standard
there is at present no standard issued by ccab bodies but must comply with law.It is nonsense to issue dormant accounts.The fmc or rmc has a separate legal existence.Trust is a loose term.The post above is sensible.The lease terms dictate the disposition of overs/unders and reserves.

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