Hi all,
I'm currently having opposing opinions from old and new accountants over management charges between a holding company and subsidiary.
The subsidiary invests in property and makes a healthy profit each year, but has very -ve RE due to questionable accounting advice in the past (putting all refurb costs through as expenses, so huge losses in the years projects were taken on, meaning no divi can now be paid). There are no expenses in the holding company other than a small directors salary. The old accountant said we could just put in a management charge from the holding company to the subsidiary to move any/all profits up the group, and then take the profits out as a divi from the holding company, where there were +ve RE due to the income from the management charge.
The new accountant says that the amount that can be charged by the holding company can only be as much as the expenses incurred in the holding company (i.e. just the small directors salary).
Which is correct? And if it's the latter, is there any other efficient way of moving the profits up the group/taking profits out of the subsidiary (other than as a salary) when RE are -ve and won't turn +ve for a long time?
Thanks in advance!
Oli
Replies (17)
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Where did the money come from to buy the property?
Did the shareholders lend money to the company group?
What does RE mean
Retained Earnings.
To the OP - if RE are -ve it basically means that the company has spent more than it has earned. So even if the costs had been capitalised how were dividends going to be paid? If expensing the refurb costs was justified (no-one here can know that) it sounds like tax-efficient accounting, which most clients would thank their accountant for.
Unless interest only borrowings I am really quite surprised there is much cashflow left in the sub (is this a 100% borrowings position, if not where are the other injected funds reflected within sub's balance sheet), Rents less Interest less other costs, less CT (if any) less bank loan repayments cannot leave much spare.
Well if that is the business model fair enough, next property shock they maybe they break their covenants to their lenders and that is it, lights out.
Most sensible people realise (at least those who survived post 2008) that such aggressive gearing may give returns but as we all know high yield tends to be an indicator of high risk; perhaps retaining funds within the sub for a rainy day, or reducing property debt, might be a smarter approach.
Well, glad to hear it, we spent from 2010 to 2016 extracting ourselves from the claws of our lenders reducing debt from £13m to £3m and our gearing was only 60% LTV, a lot of our local competitors were not so lucky, they are no more.
Re your valuation point, if residential property then what you are saying is nonsense, any investment valuation looks at lease term plus residual value at term, residential leases tend to be short so the discounted valuation of same is a negligible component (they in fact tend to get valued as if vacant) of the overall red book valuation arrived at by the valuer.
And if the backside falls out of the commercial market (which was what happened post 2008) and there is no resale market because lending dries up and not enough cash purchasers around, rents do not, in my experience ,climb; rents for commercial are a function of the wider business economy
Then again we have only been trading as a property group since the mid 1970s. (albeit I have only been here since 1997) so what do I know.
Consider W & E carefully, it is not impossible one party could become taxable( the party receiving ) whilst the cost is disallowable( the party paying); caveat emptor.
Hi all,
I'm currently having opposing opinions from old and new accountants over management charges between a holding company and subsidiary.
The subsidiary invests in property and makes a healthy profit each year, but has very -ve RE due to questionable accounting advice in the past (putting all refurb costs through as expenses, so huge losses in the years projects were taken on, meaning no divi can now be paid). There are no expenses in the holding company other than a small directors salary. The old accountant said we could just put in a management charge from the holding company to the subsidiary to move any/all profits up the group, and then take the profits out as a divi from the holding company, where there were +ve RE due to the income from the management charge.
The new accountant says that the amount that can be charged by the holding company can only be as much as the expenses incurred in the holding company (i.e. just the small directors salary).
Which is correct? And if it's the latter, is there any other efficient way of moving the profits up the group/taking profits out of the subsidiary (other than as a salary) when RE are -ve and won't turn +ve for a long time?
Thanks in advance!
Oli
If your new accountant isn't comfortable continuing the practices of the old accountant (which you yourself describe as "questionable"), and has the fibre to tell you so, I don't know what you hope to gain by posting in here. Power to your new accountant's elbow, IMHO.
Then show a bit of patience. It will be explained more fully and authoritatively in your studies than it will in a virtual room in which most people present seem to have wandered in off the streets. Virtually, obviously.
You'll doubtless get some opinions thrown at you. You'll have no way of testing them, currently. Your studies will give you those skills.
(And, thinking about it, it's not obvious that you're not better off under the new accountant's regime anyway. More info would be needed - which info new accountant has and I don't.)
Management charge can not be excessive.
New accountant has merit in his viewpoint.
Study the Norseman Gold tax case.
The arguments on Man charges and Vat are interesting.