I have a new client and the method they receive income is not something I've come across before so I wonder if anyone on here can help me with how to process their income.
The client is an art gallery in London. The gallery is a subsidiary of a company based in Europe and the gallery doesn't buy or sell anything. It is just a show area for potential purchasers who are based in the UK. So they have no sales but they do have substantial expenses (being in St James in London!!). They run a bank account from which they pay the expenses and every time the bank account is running low on funds they ask the European entity for more cash and are transferred for example £25k at a time.
Now there obviously aren't sales in the traditional sense and I don't want to show these reimbursed expenses as turnover as that isn't what they are....
So how do I treat this in bookkeeping terms?
FYI I'm using Sage 2011 and the entity is a limited company who are VAT registered.
Sounds as though the parent is trying to bundle debt into a subsidiary.
If the UK division has no income then it is not really a seperate entity and the parent should be accounting for it on a store front rather than subsidiary basis.
Rather than going into all of the ins and outs of this without the neccasary knowledge of the complete picture I think that this really needs to be handled by an accountant who may very well conclude that this is either a tax avoidance scheme or the parent is attempting to alter their gearing via off balance sheet debt (there are occurences where subsidiaries are not consolidated although these have been tightened up considerably under the latest version of IAS27).
Sorry that I can't be more help myself but as I say, you really need to talk to an accountant who specialises in this sort of area as you may inadvertantly be playing hopscotch on a minefield here.
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Hi Shaun and thank you for the quick reply. I do know from talking to an accountant that there is definitely nothing underhand going on here. It is very common for art dealers to have satellite offices in other locations which are completely separate entities. Without getting into the technicalities of it (I let their accountant deal with that!) I guess all I need to know from someone on here, and reading my post back I didn't make it clear, is how to enter the income on Sage. I do not want to use a standard sales code as effectively these transactions aren't sales. I also do not want them to show in Box 6 of the VAT return so cannot use a standard sales code. I can't speak to the accountant this week as he is on holiday (again, I'm in the wrong job!) and I'd like to get the transactions entered before I close for the weekend
I'm just thinking out loud but perhaps you could class it as a management recharge?. One thing is interesting though, if the subsidiary appears to be Vat registered and they are not selling anything then I assume they're claiming a refund every quarter. I didn't know it was possible to do this.
-- Edited by ADAS on Thursday 16th of June 2011 04:19:47 PM
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Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
They will imminently be deregistering for VAT as they have no turnover. THe business has changed a lot just recently. They used to sell paintings from the UK business but no longer do. You're correct that at the moment each quarter is a VAT reclaim which I pointed out to the accountant so he is now recommending that they deregister.
A management recharge is exactly the sort of answer I'm looking for but how on earth would I treat that in Sage??
So if I do that and post receipts under T9 then it won't show on the VAT return which is what I want... just thinking aloud here. Problem is though that it will then show as turnover which I don't want. Can I exclude 4000 from the chart of accounts maybe...?
Should have also said, in terms of the business they are in, they are an art gallery. They show art but don't sell it. Slightly tricky one I know but the accountant is a specialist in fine art dealers and galleries so I'm trusting him on the technicalities. I just wish he was available so I could chat it through with him as to how to treat the income
Hmm yes and no. It's only shows under "turnover" because Sage calls it "turnover" and you're used to thinking that's what 4XXX means.
If you changed the text on the profit and loss report so anything in the 4xxx range was grouped under the label "Management Recharge", you'd get what you're after.
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Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
Another view is that the money from the parent company should be treated as a loan, and appear on the balance sheet.
If it was a 'management charge' from the subsid to the parent, then that should be properly invoiced and treated as sales - as the money comes when the bank account is low, this doesnt seem to fit this scenario.
But we are all just guessing - Clare, you really do need to speak to their accountant!
Yes, the thought had crossed my mind so I have carried out a multitude of risk assessments and have been very cautious. I even checked out the accountant to make sure he is legitimate too. Having found out that he is I am being advised by him. I guess I'll have to wait until next week when he is back in the country to speak to him and find out how to treat this. I've been bookkeeping for years and haven't come across this scenario before. Just goes to show, there's always something new to learn however long we've been doing our jobs!
my view is that it's the approach that Enron used and we all know what happened there.
Siphon off your debt into a subsidiary that doesn't get reported in the group accounts and your gearing looks fine.
I could be wrong (as mentioned in my first post I can't see all of the facts and I don't think that Clare is privy to them either!) but I think that this entity may may using reasoning behind not consolidating that is now outlawed under the new version of IAS27.
This really should be considered a store front for the parent company rather than treated as a seperate entity.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
