Industry comment, updates and news from the Websters team.
With the economic climate remaining uncertain, service charges are continuing to give rise to tensions between landlords and their tenants. Tenants are scrutinising service charge accounts for unjustified costs and best value whereas landlords are more cautious about incurring costs unless recovery through the service charge is likely.
A technical release has been developed by the Institute of Chartered Accountants to provide guidance on accounting for residential variable service charges and covers the treatment of service charges in the accounts of the ‘landlord’ or other entity that levies service charges for the maintenance of the common parts of the property. The guidance also covers independent accountants’ reports on service charge accounts, based on agreed-upon procedures, where the terms of the relevant lease or leases do not require an audit to be carried out. The guidance focuses on accounting for service charges by residents’ management companies and similar, ie, companies where the members are also leaseholders paying variable service charges, because experience shows there to be widespread confusion about the interaction of the statutory accounting provisions of the Companies Act 2006, the information requirements of the property lease or leases, and the statutory trust provisions of the Landlord and Tenant Act 1987. Commercial landlords are equally subject to the provisions of the Landlord and Tenant Acts (LTAs) 1985 and 1987, but the issues are more clear-cut because there is generally no overlap between landlord/members of the landlord company, and leaseholders/tenants paying variable service charges. The guidance does not, therefore, deal with the statutory accounts of such entities, although the material on the trust status of service charge monies, and on the preparation of service charge accounts themselves, does apply. Obtain a copy of the Technical Release here
Confusion can often arise surrounding the precise identity of the landlord, which has been the subject of much litigation in recent years, as this article from Shepherd and Wedderburn points out.
The latest example of this is the recent case of Standard Life Investments Property Holdings Ltd v W & J Linney Limited [2010] EWHC 480 (Ch) (reported in July 2010), another example which illustrates the importance of a tenant knowing the identity of its landlord. Here, the tenant……
Read the full article here.
At the end of last week the Second Edition of the Guide for Landlords and Tenants relating to the CRC Energy Efficiency Scheme was published by the working party set up by the BPF, IPF, BCSC and others.
This Guide has been issued following the industry wide consultation which took place earlier this year and the unsuccessful attempt to try and achieve a consensus between landlords and tenants as to how the real estate industry should respond in relation to incorporating CRC in leases.
Get a full copy of the Guide here.
Maxine Quinn of Shepherd and Wedderburn notes that, following the concerns from homeowners and tenants, in Scotland, regarding excessive administration charges and lack of remedies against such practices, the Scottish Government launched a public consultation on a self-regulatory accreditation scheme for property factors. However, Patricia Ferguson MSP introduced a Bill to the Scottish Parliament on 1 June 2010 suggesting a more robust registration scheme. Read the full article here.
HMRC and the Treasury appear to be on a new offensive to collect overdue tax. In an article by Olswang LLP Alicia Videon explains how landlords or managing agents might wish to protect themselves.
The very significant increase in the number of winding-up petitions and administrations linked with HMRC and the Treasury since the July election (an approximate doubling), has raised a clear flag as to the government’s intentions towards companies that are behind with their tax payments.
Read the full article here
Once again Property Week has shown in its survey of tenants’ satisfaction that there are major concerns about the adequacy of service from landlords. Read the full article here.
Websters has been around for a long time! H. Thomas Salmon started his general practice firm in 1896. It operated in the City of London under the title of H.T. Salmon & Co until, in 1964, it merged with the West End firm, Derek Webster & Co., later to be re-named Websters in 1998. Since its formation, there have been four generations of Salmons as partners and Thomas’s great grandson, Andrew, is continuing the tradition today as one of the senior partners in the firm.
The firm grew up as a general practice firm offering accounting and taxation services to companies, partnerships, individuals and trusts. In 1960 the firm received its first instructions to audit the maintenance funds of a portfolio of residential properties. With larger commercial (particularly shopping centres) and residential instructions following, the firm recognised that the industry was often poorly served and our clients began to realise the benefits in appointing a specialist firm rather than using their own company’s auditor. As a result the firm’s focus on service charge auditing continued to increase alongside the general practice work.
In 2008 Websters ceased other general practice work altogether in order to concentrate on property management accounting services exclusively. This specialism is therefore supported by the firm’s established expertise in accountancy matters and the firm continues to be fully regulated by the ICAEW as Registered Auditors. Many of the old general practice skills are still essential when dealing with audits of, for example, residential management companies, and related tax advice and compliance.
It can safely be said that Websters is now one of the leaders in this niche market. We see the firm as a close ‘family’ and the partners and staff have always been very proud of Websters and what the firm has achieved. This is demonstrated by the current average length of service being over 15 years!!
This year we are celebrating our golden anniversary with 50 years of property management accounting services under our belts!! Here’s to many more!!
We have already reported that many residential management companies (RMCs) are not preparing their accounts correctly, as, in addition to valid company matters such as ground rents, they often include service charge payments, that are items made solely on behalf of the tenants. Service charge monies are held in trust by the company and should be excluded from the statutory accounts and reported to tenants separately. This article looks in more depth at the current position.
Following problems with the sections in the 2002 Commonhold and Leasehold Reform Act, dealing with the separate treatment of service charge funds and the provision of regular statements of account, revised proposals were included in the Housing and Regeneration Act 2008. These new sections were originally anticipated to be in place for accounting periods beginning on or after 1 April 2009 but this did not happen. However, in anticipation of the new legislation, ARMA (Association of Residential Managing Agents) had already issued, in 2008, a Lessee Advisory Note (LAN08) in which they advised that the Service Charge monies were held in trust by the management company and should not be accounted for as company assets. In June 2010 ARMA said again that their advice remained unchanged on this matter, whatever the arguments under current law. In a final complication, we understand that ARMA were advised in July 2010 by Grant Shapps, the housing minister, that the Communities and Local Government Department were not going to progress the regulations.
Therefore, although legislation will not require service charge statements to be issued to lessees, the Institute of Chartered Accountants guidance to its members accords with the ARMA guidance, in that the basic accounting principal still applies so that the accounts of service charge companies should only include those transactions where the company is acting as principal and separate accounts should be prepared for lessees of service charge transactions. Hopefully the legal position will be confirmed shortly.
With the increase in the VAT rate from 17.5% to 20% from 4 January 2011, everyone will be keen to ensure that rent and service charge demands are raised at the appropriate time so that the 17.5% rate applies for as long as possible.
The VAT rate to be applied to rent and service charge demands is determined by the tax point for the supply.
It would normally be the case that rent or service charge demands for the quarter commencing 25 December would be issued in mid-December, and should therefore bear VAT at 17.5%. If, however, due to the holiday period, the demands are not issued until after 3 January 2011, the VAT rate will depend upon whether the tenant had paid the amount due before 4 January 2011 (in which case VAT would be at 17.5%) or after (in which case it would be 20%). This is because the VAT date is the earlier of the date of the invoice and the date of payment. Therefore, to avoid the confusion of some tenants being chargeable to VAT at one rate and some at another, managing agents should ensure that March quarter invoices are issued before 4th January.
For those tenants who are able to reclaim any VAT paid on rent or service charges in full as input tax, this will only be a cash flow concern. However, tenants who are not registered for VAT, or who are partially exempt, should ensure that they make payment of their rent and service charge liabilities in respect of the quarter ending 24 March 2011 by 3 January, if they have not received a demand by that date.
So far as managing agents are concerned, who are managing residential properties, or commercial properties, where the “option to tax” has not been exercised, they should ensure that they settle liabilities before 4 January 2011 for service contracts commencing before that date for which they have not been invoiced.
By way of example; if a contractor normally bills a contracted sum of £10,000 monthly in arrears, when an invoice is raised for January 2011 (in early February), VAT of £2,000 would be have to be added by the contractor, making a total charge of £12,000. However, if the payment has been made by the managing agent prior to 4 January 2011, the total due would be only £11,750 – a saving of slightly more than 2%.
