Audit fees for service charges and freehold company

[England2007]

Dear forum,

As we here are coming closer to the annual general meeting I wonder how much we as a whole should pay for the auditing. In short we have the service charge expenses audited and as we own the freehold we also have that budget audited. We are 109 flats and then the freehold company. A freehold company does not do more than what is expected of a freehold and actually their obligations are given to a managing agent so all in all it does do much. My reason to worry is that I know the auditor who has been here for I think 20 odd years is a friend of the person getting him on board back then when he entered and that person was at the board. We pay for the service charge audit around £2,200 and for the Freehold audit £3,200 so all in all well above £5,000 and we don't use any prestigious company to do so more the contrary... I was once at the board shortly and back then we were told it should only cost around £1,000 all in all for such a small job so I find it rather strange. I have asked the managing agent what similar properties pays as I know they run many other blocks too.

Another reason for my worry is that that person at the board also arranged our money to bypass the trust we in the deed of trust are suppose to use and all our money now goes directly to accounts at the managing agent. We have a history of a huge renovation bill being paid without an invoice, something that could not have happened if the money was kept on trust.

Best regards

[leaseholdanswers]

Well what a bit of a muddle.

The freehold company incurs the cost for services even if the administration and organisation is carried out by an agent. The expenditure is put through a client account for your block and any service charge income held in that or another account must be held, as a client account and on trust either under section 42 LTA 1987 or as a specific trust requires( you make reference to a deed of trust).

The existence of a trust or otherwise matters not as regards payments, those in control must act as is expected of trustees, and an element of that is having invoices to back up payments!.

While the lease may make specific requirements on certification or you also certify these under s21 LTA 1985, for 109 flats the average certification for this at £2000/£2500 is not surprising. There will be number of invoices and records to inspect, and you should bear in mind that it varies freeholder to freeholder agent to agent just how well those records are kept and presented. That will effect the cost, as a box of invoices bank statements and some ledgers are a far cry from an agent or organised freeholder presenting books prepared to trial balance.

By all means discuss this by tabling the matter in advance of the next AGM to ask the board to look at alternatives, as they must.

In relation the FH Company this also raises issues as to the complexity of its affairs. If the company is owned by owners of all 109 flats and collects ground rents and or service charge ( even if via an agent) and is not selling lease extensions or gets other income, then the Sc account should be in the turnover and your SC accounts in most cases presented at the end as detailed Income and Expenditure report with any additional certification that the lease or section 21 requires.

In that case there is very little additional work to do other than any CT return ( ground rent) or trustees Tax to account for ( interest on any service charge monies) and the additional sum is far from sensible.

If of course there is no ground rent or other trading even though it is wrong to do so, many treat the freehold company as dormant and file a basic return and pay £75 to £150 for that.

In my experience and without seeing your accounts, I would expect, if given well prepared records by an agent, £3k all in to be at the top end, and that’s central London figures. Plus Vat of course.

[England2007]

Thank you for your input,

We occasionally sell a long lease extension and there might be sublet and alteration fees too we make money on. Long lease sales are rare and the other fees have only recently come in to play and before that he got £2,500-£2,700. I see he apart from his normal fee gets a auditors' remuneration called other, and that varies between £1,600 and £2,000 some years nothing. The persons who brought him here once told me we should not complain because the auditor would then get angry.

About the trust thing, the deed of trust which tells us how to handle the service charges and so on says money are to be held and paid upon trust, and then it says which trust we use. Money took too long getting out they said so they changed for another trust who agreed only to be custodians, which they have signed for, and now all money bypass them and goes directly to the managing agent. The original trust would not have paid up without and invoice so one can only speculate why it was important to find someone only action as custodians so the money could go directly to the managing agent. Back then the managing agent was a friend of the board members and none of them has found we need to investigate what happened. Since then we are having people not paying service charges in protest and nothing is done about it apart from tempting them to pay by slicing there accumulated depth in half... I'm sure it's because the board though not the same people anymore knows you can't go to court on the case. It's weird.

Best regards

[leaseholdanswers]

There is clearly something wrong. The charges are too high.

Where lease extensions are sold its relatively simple in that the valuer will set the figure and payment of tax is simple. The preparation of accounts is a little more detailed but nothing that warrants the additional cahrges.

I suggest that you take what you have crayon out the fees and totasl and approach some local firms. Discuss your findings with the board. Angry auditors or contractors is often a sign of intimidation to cover up such practices.

[Freehold Director]

To leaseholdanswers

Hi I notice your comments about the Company accounts and the service charges I recently told a FFT Judge that that is what Freehold Companies
have to do ( UITF information sheet 92) and he laughed at me and said I could not recover the costs of the service charge audit becuase it was in the Company Accounts.

[Gordon999]

The requirement for audited service charge accounts of income and expenditure applies after the end of the service charge year and accounts must be available
within 6 months from the yearend date. The audit is required by LTA 1985 and must be performed by a qualified professional accountant.

There is no requirement to audit the "budget account" which is just a managing agents 's estimate made at start of year to decide what levy amount to charge.

If the freehold company is owned by the 109 leaseholders, I think the annual ground rent is not demanded and has little or no annual income .
Its not necessary to audit the accounts of freehold company unless specifically required by the majority of members or required by hmrc tax rules .
You can buy a copy of the company recent annual accounts from Companies House Online ( costs one pound to download ) .
So I don't understand why you say 3200 is charged for audit of freehold company accounts ?.

[leaseholdanswers]

The requirement for audited service charge accounts of income and expenditure applies after the end of the service charge year and accounts must be available
within 6 months from the yearend date. The audit is required by LTA 1985 and must be performed by a qualified professional accountant.?.

I have explained several times that although this is in law, it is not in force as no commencement order has been issued, nor will there be one in this parliament.

[leaseholdanswers]

To leaseholdanswers

Hi I notice your comments about the Company accounts and the service charges I recently told a FFT Judge that that is what Freehold Companies
have to do ( UITF information sheet 92) and he laughed at me and said I could not recover the costs of the service charge audit becuase it was in the Company Accounts.

And he is right. A company has obligations which may incur costs. It can only recover costs under its contracts, the leases, if they allow.

if they dont that means the company must, using its income eg ground rents or payment by members or shareholders.

[leaseholdanswers]

There is no requirement to audit the "budget account" which is just a managing agents 's estimate made at start of year to decide what levy amount to charge.

If the freehold company is owned by the 109 leaseholders, I think the annual ground rent is not demanded and has little or no annual income .
Its not necessary to audit the accounts of freehold company unless specifically required by the majority of members or required by hmrc tax rules .
You can buy a copy of the company recent annual accounts from Companies House Online ( costs one pound to download ) .
So I don't understand why you say 3200 is charged for audit of freehold company accounts ?.

What he means is audit the service charge expenses.

As they sell lease extensions and collect ground rent they must report as active. Their freehold also has a considerable value.

They need the GR as the leases do not allow them to recover all of the companies costs.

I agree though that the costs is stupid and does not reflect what is relatively simple stuff.

If there is deed or dec of trust that may impose further obligations as well.