The values of most investment and development properties have deteriorated over the last year or so.
Falling values have had a significant impact on the balance sheets and tax positions of property companies. Directors are more than ever having to consider, plan and account for changes in property values.
In June 2008, the Financial Reporting Review Panel (FRRP) announced that it would be reviewing the accounts of all companies containing qualified audit reports. Although the FRRP has not written to every such company as a result of this review, it has been writing to a selection, drawing attention to the directors' responsibilities under the Companies Act to prepare accounts that comply with the law and accounting standards.
Even private company directors need to be aware that the FRRP may now take an interest in their accounts.
In addition to the need to comply with the appropriate accounting standards, particular care is required for accounting and taxation purposes when appropriating property between stock and fixed assets and booking write downs.
The FRRP has the power to apply to the court for an order seeking the revision of defective accounts. To date it has not needed to exercise this power as the companies which have fallen under its investigative remit have always revised their accounts voluntarily. It is worth noting that if the matter goes to court and the FRRP is successful, the court costs could fall to be paid by the directors of the company personally.
Accordingly, we strongly recommend that directors of property companies consider their responsibilities under the Companies Act. The costs of revising accounts would be particularly unwelcome at the moment.
It is also worth noting that HM Revenue & Customs (HMRC) is becoming increasingly sophisticated in its approach to enquiries and is challenging figures in audited financial statements. A qualified audit report is an open invitation to HMRC to have a good look around your accounting records and ask a few leading questions. Even without an adjustment, the cost of such an enquiry can be considerable.
There is a silver lining for trading companies, if for example property stock has had to be, or will at the balance sheet date need to be, written down, tax relief is likely to be available. With careful planning and timely action, much needed repayments of tax can be extracted from HMRC by means of the appropriate loss carry-back and repayment claims.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
