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s75 ICTA88 Management expenses - idiots guide

s75 ICTA88 Management expenses - idiots guide

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Excuse the very basic question but whilst I did study this many years ago, I have not dealt with a property management company for many years and seem to have forgotten everything!

A SA client I already work for has recently been appointed as a director and shareholder of the property management company for his building, along with the 3 other residents.  (It is an old house split into 4 residences). He has asked me to take over the accounts and CT600.

The company holds no assets but deals with insurance and maintenance of the building.

Last year's CT600 shows the small surplus (after losses b/f) being entirely relieved by management expenses under s75 ICTA88 in box 24.   There is no figure in the Excess Management expenses box 136.

So, I look at the tax comp believing that there has to be a breakdown in there but there is no mention.

My questions are:

1. It seems rather co-incidental that the management charges available would exactly equal this year's surplus.  Presumably there should be a reconciliation of excess mgmt expenses b/f, c/f? There is no info in the pack form previous accountant, but presumably I should be asking him further for this info? Would HMRC know?

2. Whilst I have a vague understanding that these management expenses would ordinarily result from the company no longer having investments (i believe it may have previously held the leasehold of the business but I am not sure as the company is 9 years old and the last 5yrs accounts certainly don't show investment assets), I really can't remember much more about them, the conditions of using them etc.  I have tried good old google and looking in old text books but have not found any useful information.  Does anyone know where I could get a quick refresher? Or be kind enough to enlighten me?

Thank you!

Replies (32)

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Teignmouth
By Paul Scholes
01st Jul 2015 11:05

Weird

Hi

You are right to be puzzled.  Sounds like a fiddle to remove what would otherwise be shown as a taxable profit or loss.

I would definitely ask the old accountant (HMRC won't know) but be prepared for "don't know that's how it's always been done"

It's been a few years since I handled one of these but, depending on the 4 leases, it's likely that the transactions are not those of the company and should be dealt with as if it's an agent, ie outside its books, leaving it with dormant accounts.  There have been years of argument over this but that's what HMRC was happy with when I did them.

Failing that, if they are shown as transactions of the Ltd company then you should tell HMRC of the nature of the company, ie not trading, as they will excuse you from doing CT returns for 5 years at a time.

For the current CT600 I'd just remove any taxable surplus or deficit as a computational adjustment "non trading entry" or similar.

No wonder I gave up doing management companies!

Thanks (1)
Giraffe
By Luke
01st Jul 2015 11:18

Thanks Paul

It's not just me then!

I will ask the previous accountant for a breakdown but don't expect much!

The service charge is the only income (£6k) and expenses for ground maintenance, insurance and accountancy have all gone through the management company. Thanks for the tip to note the company as non-trading with HMRC.

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By johngroganjga
01st Jul 2015 11:36

As the company's management activities are outside the scope of CT, perhaps the last accountant's method was just a clumsy way of showing no profit on the CT return.

I agree with Paul that the simple way going forward is to see if HMRC will agree that the company does not need to submit CT returns at all, which in my experience they normally do in those circumstances.

Where I do not agree with Paul is that the company should prepare dormant accounts.   

Thanks (1)
Teignmouth
By Paul Scholes
01st Jul 2015 12:51

For what it's worth

The debate over whose transactions & bank balances these are has been going on for about 15 years I think and, unless this article has been superseded, John & I will come at it from both directions. 

As I say, the leases should always be considered in this, but my problem in bringing the income & expenditure into the company's P&L was always that the L&T Act made the bank balance a trust asset and therefore it would, in theory, have to be removed from the balance sheet making the double entry...interesting.

Far simpler for me and my clients to send the tenants a summary of the service charges income & expenditure and balance sheet, in a format they would understand with, if necessary, a forecast of the year to come and the s/chs to be collected.  Making the Company accounts a dormant irrelevance.

Thanks (1)
By johngroganjga
01st Jul 2015 13:04

Out of date

Yes that article has been superseded - in particular by paragraph 33 on page 49 of FRED59, which settles the question once and for all.

Yes it has been a topic for debate for some time - but not any more.

Accountants who have hitherto been preparing the accounts of RMCs as if they were dormant will now have to mend their ways.

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By nick farrow
01st Jul 2015 14:29

v interesting

 I thought you could just flex the turnover to match the expenses

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By Steve Kesby
01st Jul 2015 15:12

@ John

I don't think an exposure draft, issued for comment, settles any questions "once and for all".

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By johngroganjga
01st Jul 2015 15:17

Generally not, but that particular part of it is clearly the settled view of all who matter, and comment is not invited. Perhaps you are not aware of the history of this particular issue. It's nothing to do with tax.

But yes, nothing is forever.

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By Steve Kesby
01st Jul 2015 15:48

You're wrong John

Everything is to do with tax. Tax is inextricably linked with life, the universe and everything. That is a logical consequence of the interconnectedness of all things.

Apologies. I thought you were referring to FRED50, rather than FRED59. Having read the paragraph to which you refer, it does appear that there will not be any wriggle room.

Unfortunately legal opinion appears to have been obtained on the wrong issue. The opinion is that the company engages in the transactions as principal and not as agent, but no opinion appears to have been sought on whether it engages in those transactions in its capacity of trustee or in its own capacity.

In the former case, the transactions should appear in the accounts of the trust, rather than the accounts of the trustee. Only in the latter case should the transactions appear in the company's accounts.

Wrong questions habitually yield wrong answers.

Thanks (1)
By johngroganjga
01st Jul 2015 16:04

If you think you know better than those who set accounting standards for us then good luck.  For me life is too short.

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By Steve Kesby
01st Jul 2015 16:47

Personally...

... I'm not to fussed what the FRC say the accounting treatment should be, but if they're going to base their accounting treatment on a legal analysis, it is my view that the legal analysis should answer the appropriate question.

There is a reason why the legal analysis here hasn't answered the appropriate question, in my opinion.

It is similar to the reason that tribunals frequently reach an incorrect conclusion.

Thanks (1)
Teignmouth
By Paul Scholes
03rd Jul 2015 00:49

In reality

The technical ins & outs will have no effect on a significant number of RMC accounts prepared and submitted, without the help of an accountant, many of who anyway, unlike John, will also not know, or care, after a dozen years of procrastination by the accounting and letting agent bodies.

As it happens, historically, the prime significance of all this was to do with tax. After a decade of confusion and ignorance within the accountancy profession and their reg bodies HMRC issued guidance in 1999, or thereabouts, concerning the need to submit trust tax returns for income generated from service charge monies.

I took over a classic example of this in which the RMC had been declaring thousands of pounds a year of interest in its P&L and where the firm handling things managed to offset "management expenses" to negate any CT liability.  The interest should have been declared on a trust tax return with, at the time, a much higher tax rate.

Fortunately, a few years back, commonsense and low interest rates prevailed and so that aspect seems to have gone away, but it just goes to show how accountants and their regulatory bodies can disappear up their own back passages, whilst the rest of the world (now including me thank god) can get on with life.

PS:  John, the last time I was told to "mend my ways" was in the 60s by a wannabe Victorian with a cane in his hand, hope you got out of bed the other side this morning.

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By mikewade
06th Jul 2015 12:57

Simple solution?
Raise an accrual entry which equals the total of the surplus, as you are not running this for profit any s/charges collected will either be used to defray expenses and any ultimate surplus will be returned to the leaseholders as an overpayment.
Or am I missing something?

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By johngroganjga
06th Jul 2015 13:03

Solution to what?

You can't accrue for expenses that have not been incurred.

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By pjlevi
06th Jul 2015 13:07

Outside the scope of Corporation Tax?

 

Mutual Trading perhaps?  

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By Old Greying Accountant
06th Jul 2015 13:07

All I do ....

... for better or worse, is move any surplus or deficit in the year to a repair reserve so the P&L is always exactly nil, after all that is what, for these type of properties, is going on, and is how the owners see it - regardless of the [***] the regulatory and professional bodies spout.

Nobody gives a damn anyway, they are not trading companies, they are more mutual societies (in fact many were registered as such).

Thanks (2)
By Steve Kesby
06th Jul 2015 13:10

Mike's suggestion...

... is really just the flipside of Paul's "what do you do with the other side of the double entry".

According to the FRC's legal opinion, the money in the bank account does not belong to the company, and doesn't go on its balance sheet.

When the leaseholders put money in that bank account on a regular basis, it is not income of the company; that's them putting their money in their bank account.

When the company pays for expenses, that is it incurring its costs as principal. In paying those expenses it has taken money out of the leaseholder's bank account and applied it for a valid purpose. So that must be its income.

So whatever the expenses are, the income should always be the same amount. What a ridiculous set of accounts!

Thanks (2)
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By carnmores
06th Jul 2015 13:31

well i also make the expenditure equal the income as per #OGA

by transferring to or from a maintenance reserve as the company is not trying to make a profit

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By Ammie
06th Jul 2015 13:31

WHY CAN'T IT BE SIMPLE?

Admittedly I haven't been involved with one of these for longer than I care to remember.

I cannot see how the company is dormant, but that is not my issue.

As long as the articles of association clearly state its purposes as non trading but for management purposes, with specific statutory reference, and for only the benefit of the leaseholders and it is referred to HMRC, then there should not be any difficulty obtaining clearance from returns and tax.

In fact, I have seen it on more than one occasion where the balance of any surplus is accounted for as deferred income, hence exactly nil profit, on the basis that any surplus has been deferred for the benefit of the leaseholders future expenses.

Probably not exactly per FREDs but as long as the policy is clear in the accounts and HMRC have given their "blessing" there should not be concern.

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By carnmores
06th Jul 2015 13:43

the company is not dormant

but it could be non trading  

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By Old Greying Accountant
06th Jul 2015 13:55

I have been doing these ...

... over 25 years and have never had a query.

Does any one really think HMRC have the time, inclination or manpower to invest in such piddly amounts of "surplus". 

Does anyone really care, if a flat changes hands and prepayments or arrears is sorted out on the completion statement.

To me though, the fact that in most cases there is no right to a refund if you do leave says it should be dealt with as the companies money, otherwise if there were say 10 flats and £20k in the bank you should be entitled to £2k back if you sell! You are not, and as far as the "tenants" are concerned, when the money is paid to the company it belongs to the company.

I see no difference between an RMC and a charity in that respect. The money belongs to the company, but it has restrictions on what it can spend it on, in the same way charities have restricted funds.

I am with Michael Gove, our legal system is well overdue a radical overhaul, why is it a few chinless wonders can impose a view contrary to the received view of the vast majority of the population? Surely the law should reflect the consensus, not alter it with warped logic! 

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By Chris7
06th Jul 2015 13:52

We're in a very similar position. 3 years ago I became a director of the management company which holds the head lease on a block of 262 flats. The former accountants had been filing as dormant and HMRC contacted us with their opinion that

1. We are NOT a dormant company - we have always filed accounts so I'm not sure why we were recorded as such

2. We ARE carrying on a trade, but as we are only trading with ourselves (collecting Service Charge from members and spending it on services for the benefit of members) we are exempt from ant CT on our "profits" (surplus)

3 The only area where CT is payable is on the Bank Interest which we receive on our contingency reserve. 

From the comment above -  "according to the FRC's legal opinion, the money in the bank account does not belong to the company, and doesn't go on its balance sheet"  - then why is CT payable on interest earned by the company on funds it is only holding on trust on behalf of the members?

 

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7om
By Tom 7000
06th Jul 2015 18:09

Here goes

 

1. No tax unless interest exceeds £100..then report on CT600 interest only

2 Company submits 'empty' accounts to CH as it is a trustee and holds transactions for residents

3 Residents get Service charge accounts

4 Check the lease some say they need to be audited....ooohhhh!!!!

5 This is the reporting requirements

https://www.icaew.com/~/media/corporate/files/technical/technical%20rele...

6 Residents have to get accounts within 6 months of year end or they dont have to pay and te managing agent takes the costs to his own account...this is the dangerous bit

7 You have to comply with the law of property act on the trnsactions as well as the company act

 

8 a Some associations set a budget and bill that and report Zero  ''profit'' any excess is shown as under or over budget and returned to residents or billed. The doube entry puts it in the Balaance sheet as a Dr or CR.

 

8b Some take the excess or shortfall  ''profits'' and add them to reserves as a sinking fund

 

8c Some cant make their minds up and argue a lot aboutwhich way to do it

 

9. There should be a reserve or provision for dilapidations. ( retained P and L in old money)

 

10. Some leases dont have charging clauses and then the residents dont have to pay and the lawyers get sued....true story

 

11 .  If its a new estate dont forget the builder has to pick up his share of the voids. ie if theres 800 houses finished but only one resident the resident pays 1/800th of the costs not 100% The buider picks up the rest. On a large build this can become complicated as houses are released to the residents company

12 Sometimes there are different schedules ie the people in the flats have one set of charges and cost,s the ones in the houses have another. You have to keep the amounts separate,and report separately checking the % charges are in accordance with the lease.

13 Communal electric and heating ( gas)  get someone to read the meters...guess what happens if they are not read for 20 years and the gas company has been putting through a small estimate

14 disclose transactions with residents managing agents and accounting fees so its transparent

15 Managing agents charge a lot, much more than your accounts fees....dont underestimate the amount of whinging they put up from the residents...check the charges agree to the quote and they didnt make a mistake...I know its not an audit...but...only takes 2 minutes and you might have stopped a fraud.

 

16) Watch out if they sell the free hold or a carparking space as tax will need to be looked at

Crumbs i seem to know a lot about this...

Good luck

Tom

 

Ps I would never buy one with service charges , because one day, with no sinking fund you suddenly get a bill for £25k for a new roof and thats not funny ...

 

 

 

 

 

 

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Replying to DJKL:
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By Chris7
06th Jul 2015 18:19

Very Impressive - Thanks1

Tom 7000 wrote:

Crumbs i seem to know a lot about this...

 

You certainly do! - that's very impressive.  Now if you could just cover off Section 30 consultations and limits on qualifying expenditure  ;-)

 

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By johngroganjga
06th Jul 2015 18:28

Impressive indeed, but there is one weakness, namely out of date knowledge leading to point 2 being incorrect. Refer to the paragraph in FRED 59 I pointed out. If it was ever right to prepare dormant accounts (in my personal opinion it was always nonsense) it is no longer.

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By Chris7
06th Jul 2015 18:35

Yes that certainly fits with what HMRC have told us (although 2 sets of accountants have been filing dormant accounts for years). It was only when we ditched our managing agents and went from being insolvent and running a £25K deficit to suddenly having £100K/yr surplus that HMRC woke up to the situation!

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Giraffe
By Luke
07th Jul 2015 11:07

Thank you all for your comments

And special thanks go to Tom for his detailed reply.

I didn't realise it was such a controversial topic!

I have just had a call from the previous accountants saying that the Management expenses shown in the CT600 were a balancing figure to remove any profit.

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Teignmouth
By Paul Scholes
07th Jul 2015 16:49

And so we are still up in the air

OGA the main problem with all this, and why a RMC can not be compared to a Charity, is that the money being collected and expended is governed by the Landlord & tenant acts which, 20 odd years later, are now in conflict with half-arsed revised accounting treatment and which are still, as far as I can see, being used by HMRC.

So both FRC and HMRC seem to agree that as any money is collected by the RMC, it does so as an agent (so it's not its income), whereas (as if to make more work, grief & fees for us) the FRC are happy to accept legal opinion that, by default, the moment money is expended the RMC is doing so in its own name and so is entitled to be reimbursed from the "trust" fund, the balance of which, everyone seems to agree, should not be on the company's, association's, landlord's balance sheet.

WALOB

Finally, per the Trust & Estate tax return guide (bottom of page 11) HMRC still expect interest on service charge monies to be declared as trust income and not company income.  Fortunately, these days, this will be pennies and. in any case, it is taxed at basic rate so HMRC is unlikely to kick up a fuss as long as they get their cut.

WALOB

 

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By johngroganjga
07th Jul 2015 17:02

I agree that it's a load of nonsense. It's what happens when accountants take too much notice of lawyers and forget the reason why they prepare accounts.

Happily we have now moved on from the nonsense that RMC's accounts should be prepared as if they were dormant. What earthly use were such accounts to the shareholders, creditors and other interested parties of the companies in question?

But now we are left with the nonsense that RMC's by definition cannot have any unspent cash. Why does anyone think that that makes the accounts more useful and helpful?

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By Ammie
08th Jul 2015 14:40

CONSENSUS

Seems to me there isn't a clear consensus on the correct treatment and too much of it is subjective with guidance from the various authorities.

Another ridiculous level of bureaucracy on what should be straight forward and represent the substance of the arrangement.

Keeps the lawyers and civil servants in work I suppose. 

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Teignmouth
By Paul Scholes
09th Jul 2015 14:48

Lawyers & Civil Servants?

They follow & interpret the law set by Parliament, in this case The Landlord & Tenant Acts and the Commonhold & Leasehold Reform Act.  

On balance I tend to think it's us lot & the FRC who have made a pig's ear of it, but then, in quite a bit of what & how we do stuff, this keeps clients confused and fee income high.

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By Ammie
09th Jul 2015 15:48

INTERPRETATION

I don't disagree Paul.

It's the "interpretation of the law" bit that makes the issue too subjective. Sometimes financial accounting and law interfere too much with one another, and this is a typical result.

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