Hello, I have a client with a Limited company. He has two trades, one is buying and selling of the real estate and the second is Managing the real estate.
This is the first year and the first time I am preparing the accounts for this client. I have a rough idea that I have to prepare two P&L and one B/sheet. On CT600 it shows separately as well. I use the cloud accounting software and I cant seem to find anything related to this. I need to understand how to start the process.
I would appreciate it if anyone can help me understand this process of preparing the accounts and the tax return.
Mina
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Replies (31)
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Is the chart of accounts in the bookkeeping software set up to keep the income and expenses from each trade separate?
Hi, I have checked with the software provider and they do not have the facility to separate the trade. Not sure how would I go forward.
Hi, I have checked with the software provider and they do not have the facility to separate the trade. Not sure how would I go forward.
Can you not set up separate cost centres or departments in the chart of accounts? If not then create account codes for the separate trades.
eg
Professional fees - investment property
Professional fees - property management
Then your reporting module should make it possible to pull out reports for each trade.
Thank you. I have left a message to the software provider asking the same if I can have a separate reports.
I should stay off the real estate threads (and generally do, unless Justin says something stupid), but that sounds like two trades in much the same way that Cadbury's has one trade of making chocolate and a separate trade of pouring in a glass and a half of milk.
Managing whose real estate, the company's own or that of third parties?
Managing own real estate which is purchased, developed and resold is all one trade imho, it is merely incidental management of properties being developed.
My point, more prosaically made.
I may have read too much into "the" ("the second is Managing the real estate"), but tax training gets you doing that.
They are managing residential properties own by others.
They bought property, will convert into flats and resell them.
Right, re company statutory accounts both trades will be merged, you do not need two profit & loss accounts merely one but you may wish to prepare two distinct detailed profit and loss accounts, or one set bringing out profit of each trade, if you do actually have two trades. (see below)
You only do one CT600, in the attached calculations if you consider it necessary you split out the two trades by having two calculations attached, the CT600 guidance says re box 155,
"Please include a separate calculation of the profit or loss of each trade, showing any adjustments made to the figures in the accounts to arrive at the amount of profit or loss, and any capital allowances or balancing charges included in the calculation of the profit or loss."
https://assets.publishing.service.gov.uk/government/uploads/system/uploa...
Re whether you really have two trades here, I would read attached HMRC guidance.
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim80530
I have my doubts and would suggest you consider this particular point in above at
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim80535
"In terms of companies, activities are only likely to amount to more than one trade if:
one activity is so different in nature from the other that it can be seen as quite separate; and
the activities are separately organised and managed right up to Board level."
I suspect the company falls at the second point and only has one trade.
Thank you very much for your detailed guidance. I think I understand now what to do. I will also go through all the links and come back to you if I still have any confusion.
Many thanks
Hi, I have read everything you have advised above and have a couple of questions.
I have asked the software provider how we can show the separate P&L calculation on CT600. I doubt it that it is possible. In this instance, how do I show this separately?
If after couple of years once the reconstruction of the building is done and the client starts selling the flat, how would I work out the profit? All the expenses of property management and buying & selling business would be together in the P&L. Do I just calculate the corporation tax on the total or do I need to show separately?
Also if for any reason new flats are not sold and client decide to keep the flats as a rental investment, how do I calculate the appropriation of trading stock to investment? How would I come up with the closing stock if all the expenses are together?
I am sorry if my questions are not clear, I can explain again if need. I rather get it all clear in my head.
Cost Centre Accounting/Project Accounting/Sub Nominal codes, etc etc,, but frankly if there is even the faintest chance of appropriation of completed flats to investment properties your accounts layouts etc are frankly the least of your worries.
I have no idea about the software you are using but if it cannot manage the reporting you want, manage things like CIS you likely need, cannot manage vat accounting if your client changes his her mind re developing and resale, then it is the wrong software for the job and is akin to putting in a screw with a hammer
I should have also mentioned accounting for stock, the costs re the properties being developed do not flow into the P & L until sold, they carry in stock.
If it does not shift, hit it with a hammer, if it still does not shift hit it with a bigger f*****g hammer.
First impression the client has some wealth and may have tax and business challenges to match.
Second impression you are floundering and may be out of your depth.
Filling a knowledge gap on this forum comes with the caveat that you may not have identified and explained the real extent of the problem .
DJKL's reply gives a hint of the research required, and not to make untested / uncritical assumptions.
I refer you to Donald Rumsfield's observations on the parameters of knowledge.
Do not mock.
Covid 19 advisors are cognisant of the knowledge gap .
Tread carefully.
I know I don't have enough knowledge. I would be grateful if someone can put me in the right direction.
there shouldnt be any problem separating costs and income for the 'different' trades any decent software should do that but there arent 2 trades i would surmise, what software are you using? the only possibly spanner is if they generate rental income from their own property then they might have to use the additional CT600 pages for property income. you dont really have a problem
Hi, thank you for your reply. I understand that there are no separate trades here so software is not an issue. I would like to know that the property, purchase cost, planning and solicitors cost etc will be treated as trading stock. So when I prepare the first year account this trading stock will go to the B/S as an asset. Right? What will he the affect on the P&l? Will the purchase and related cost create the loss in the P&l. I am sorry I completely lost my mind here.
No, when you incur the cost it effectively is (ignoring a purchase ledger and pretending cash accounting in the books, for simplicity) say:
Dr Stock 100
Dr Vat 20
Cr Bank 120
(Vat posting assuming you are building say new build residential for resale and can reclaim input vat)
The stock keeps building up on the balance sheet as you build.
When you sell the flat for say £160,000 you have
Dr Bank £160,000
Cr Sales £160,000
You then release the associated stock cost re the asset sold , say:
Dr Cost of sales say £120,000
Cr Stock say £120,000
With the total costs.
So P & L at that point
Sales £160, 000
COS £120,000
Gross Profit £40,000
So if you have numerous purchases towards the build you keep augmenting the stock and only recognise the cost re the particular flat in the P & L when you sell.
You could run numerous stock accounts, one for each flat and say one for the common costs to all flats, you would release to P & L the costs re the individual flat and a suitable proportion of the common costs re the particular flat when you sell the particular flat, remember your sales could stretch over multiple years
Now there are other ways to go, you allocate each cost to a job/project cost, post all costs to purchases/direct labour/sub contractor costs etc and adjust purchases at each year end for the costs re the unsold units at each period end,
Dr Stock
Cr purchases
The fact you are asking this particular question indicates you have very limited accounting knowledge, basic accounting for stock will be covered in accounts taught in schools at ages 14-16, it is pretty basic accounting, so step one is an accountant to advise correct software, correct nominal structure, correct cost centre set ups, if you do not do this at the start you will likely make more work for the accountant (and a higher fee) when he/she tries to untangle what you have done, and you will certainly need an accountant.
If there are vat implications re say letting some finished flats and selling some finished flats ( zero /exempt supplies) you really ought to be able to readily calculate from the accounting system what input vat directly relates to each flat, again correct structure/software is your friend.
Please consult an accountant, profit margins on construction can be down at 20%, vat on materials is 20%, get things wrong and your errors re structure/approach/control of costs can make serious inroads into any profit you may have made, imho if vat on property is not the most difficult area of vat it is at least in the top five,so caveat emptor.