Corporation tax due or not? Wresting control of an apartment management company.

[L_earner]

I am in the process of wresting control of an apartment Management Company from developers, and putting it into the hands of a well-organised group of owners. The apartment owners have not been asked for management company fees for years. Yet the developers have put in audited accounts showing healthy profits every year, as if invoices had been sent out.
This of course has attracted hefty corporation tax which is now shown in the accounts as being owed.
The apartment owners are understandably reluctant to become directors until their financial liabilities are sorted out reasonably.
Any ideas what can be done here?

 

[ClubMan]

Re: Corporation tax due or not?

I am in the process of wresting control of an apartment Management Company from developers, and putting it into the hands of a well-organised group of owners. The apartment owners have not been asked for management company fees for years. Yet the developers have put in audited accounts showing healthy profits every year, as if invoices had been sent out.

Are you saying that the accounts were inaccurate in that they stated income (management company annual subscriptions payable by householders) which were never collected?

The apartment owners are understandably reluctant to become directors until their financial liabilities are sorted out reasonably.

You mean their individual liabilities to the management company in the form of annual subscriptions no invoiced for but still due or liabilities of the company to Revenue?

Sounds to me like the householders may need independent professional advice from a suitable qualified accountant and maybe also a solicitor on these matters.

 

[L_earner]

Re: Corporation tax due or not?

Are you saying that the accounts were inaccurate in that they stated income (management company annual subscriptions payable by householders) which were never collected?

Yes. Even people who were selling their apartments were not asked to give annual subs, but still on paper the audited accounts showed income, entered as debtors.

You mean their individual liabilities to the management company in the form of annual subscriptions no invoiced for but still due or liabilities of the company to Revenue?

There is no question but that apartment owners will pay back subs to the management company to cover debts incurred due to running costs. The issue is having to pay for the management company's debt to Revenue, when in reality there was no profit, and hence no tax should ever have been payable.

Sounds to me like the householders may need independent professional advice from a suitable qualified accountant . . .

The eminent firm of accountants that acted for the management company never bothered to check if the the management company had even tried to collect subs. Ironically, part of the debt the current crop of owners is being asked to cover is the fee for the same firm of accountants. I feel their pain!

 

[ClubMan]

Re: Corporation tax due or not?

Yes. Even people who were selling their apartments were not asked to give annual subs, but still on paper the audited accounts showed income, entered as debtors.

If the company filed false accounts with the CRO then I would assume that this is a serious issue? Has the CRO or ODCE been notified of the alleged inaccuracy of the accounts filed?

 

[extopia]

Re: Corporation tax due or not?

What kind of contracts do you have with the management company? Has the management company actually done any work - in other words has it kept up its side of the contract? Is there any chance of just letting the management company go bust and taking over afterwards? Does the management company have an ownership interest in the building?

Sounds like you need professional advice alright.

 

[ubiquitous]

Re: Corporation tax due or not?

The eminent firm of accountants that acted for the management company never bothered to check if the the management company had even tried to collect subs.

How can you say this if by your own admission the audited accounts were prepared by the developers? Unless you are intimately connected with the developers, you would surely have no idea what enquiries were made by the auditors to the directors of the company at the time?

Even people who were selling their apartments were not asked to give annual subs, but still on paper the audited accounts showed income, entered as debtors.

Are you sure this treatment is incorrect? Based on the limited information to hand, it doesn't sound incorrect to me. If the debts remain collectable and legally enforceable, then it would be hardly in the best interests of the company, or its shareholders, for them to be written off. Were the company directors to agree to the premature writeoff of such debts, they could face accusations of failing to protect the interests of the shareholders. As could the auditors.

Ironically, part of the debt the current crop of owners is being asked to cover is the fee for the same firm of accountants. I feel their pain!

Do you think the auditors should be left unpaid for their services? Do you expect another auditor to take over the role if the previous incumbent has been treated in this way?

 

[L_earner]

Re: Corporation tax due or not?

If the company filed false accounts with the CRO then I would assume that this is a serious issue? Has the CRO or ODCE been notified of the alleged inaccuracy of the accounts filed?

This question is now with the owners' solicitor.

 

[L_earner]

Re: Corporation tax due or not?

What kind of contracts do you have with the management company?

Nobody is sure about this. There appear to be different versions of a written lease agreement in existence. Some original owners say that they had a lot of difficulty buying the apartments as the management company responsibilities were vague. They collected management charges when the apartments were bought. Then, for years, they were never seen again, and no requests for payment were made.

Has the management company actually done any work - in other words has it kept up its side of the contract?

They have done almost nothing. The apartment owners have taken care of everything in the complex. As far as anybody knows, all the management company have done is pay the bills for insuring and lighting the common areas.

Is there any chance of just letting the management company go bust and taking over afterwards?

I have seen this option discussed in other forums in askaboutmoney.com and it seems like an expensive route to take. The snag seems to be that the common areas are the property of the management company. Setting up another company does not solve it.

Does the management company have an ownership interest in the building?

I don't know. How would I find out, and what difference would that make?
By the way your comments and questions are helpful. Thank you.

 

[L_earner]

Re: Corporation tax due or not?

How can you say this if by your own admission the audited accounts were prepared by the developers? Unless you are intimately connected with the developers, you would surely have no idea what enquiries were made by the auditors to the directors of the company at the time?

I asked them straight out if they had checked. They admitted that they had not. They relied on the assumption that the directors had issued requests for payment of the management charges. Simple as that.

Are you sure this treatment is incorrect? Based on the limited information to hand, it doesn't sound incorrect to me. If the debts remain collectable and legally enforceable, then it would be hardly in the best interests of the company, or its shareholders, for them to be written off. Were the company directors to agree to the premature writeoff of such debts, they could face accusations of failing to protect the interests of the shareholders. As could the auditors.

This is the kernel of the matter. As the directors did not ask the apartment owners for management charges, the owners argue that there is no debt. Even if there was a debt, as far as I know, it is only enforceable so long as a person remains an owner of the apartment. Hence the wisdom of catching people for unpaid management charges when they are selling out. What the directors have done is inflict the worst of both worlds on the remaining apartment owners; they have failed to collect or even request the charges from people who were selling, and still accounted for having requested that payment for the purposes of calculating profit, resulting in additional tax liability. That brings me back to my original question; what options are open to the owners; do you think that Revenue would listen to a sob story such as this?

Do you think the auditors should be left unpaid for their services? Do you expect another auditor to take over the role if the previous incumbent has been treated in this way?

As the directors are the ones who landed the firm of auditors in it, I believe that they are morally obliged to pay up, but it is the shareholders who ultimately have to pay the bill. There is something unfair about that, since the auditors, by their own admission, relied on the incorrect assumption that management charges were being requested / collected. However, the apartment owners recognise that it is the directors who are mostly at fault, not the auditors, so the bill will almost certainly be paid.

 

[ubiquitous]

Re: Corporation tax due or not?

Thanks for clarifying those points. Best of luck with the remainder of the process.