Related Party Transactions in Service Charge Accounting: A Guide for Managing Agents
Qube Talk: Service Charge Accounting Insights
Welcome to another episode of Qube Talk, where we discuss all things service charge accounting.
I'm Ray Armand, and I'm joined by CJ Ralfe.
Today, we're untangling related party transactions.
Have you ever been asked by your service charge accountant whether there are any transactions with related parties and found yourself wondering what exactly they're asking?
If so, this episode is for you.
There are three pain points we repeatedly see in this area.
First, managing agents are often unclear about who actually counts as a related or connected party.
Second, many managing agents don't have a consistent process for identifying related party transactions. Often, they only think about it when the accountant asks the question at the service charge year end.
Third, where disclosures are made, they can sometimes be vague or miss important information.
That can create mistrust and delays during the year-end sign-off process.
In this episode, we're going to look at:
How to identify related party transactions
How to document them
What evidence to retain
What should be disclosed in the service charge accounts
Common red flags to look out for
How to build related party checks into your managing agent processes
What Is a Related Party Transaction in Block Management?
Ray Armand:
Let's start with what a related party transaction actually means in block management.
Service charge accounts aren't the same as statutory company accounts filed at Companies House.
However, they are still formal financial reports, and there is an expectation that they should be transparent and prepared consistently with relevant sector guidance.
One of the important pieces of guidance commonly referred to in service charge accounting is ICAEW TECH 03/11.
CJ, in plain English, what is a related party transaction?
CJ Ralfe:
A related party transaction is essentially a transaction where the block's money is paid to someone who is connected to the landlord, the RMC, the managing agent or a key decision-maker.
It could also involve businesses connected to those people.
The important thing is that the relationship needs transparency.
Why Related Party Transactions Need Transparency
Ray:
Let's make that practical.
Imagine somebody has been engaged to carry out gardening work, roof repairs or another service.
The question is:
Are they connected to somebody who had influence over the decision to appoint them?
For example, imagine a development has 10 units.
One of the largest annual costs is garden maintenance.
The person providing that garden maintenance happens to be the father of someone living in one of those units.
The other nine leaseholders may reasonably ask:
Are we getting a fair price?
Was there a proper tender process?
Was this supplier selected because of the relationship?
Even if everything has been handled properly, the relationship itself can create questions.
That's why disclosure matters.
The aim isn't necessarily to say that related party transactions are wrong.
The goal is to remove uncertainty and demonstrate that proper processes have been followed.
Guidance for Related Party Transactions in Service Charge Accounts
There are several sources managing agents and service charge accountants may refer to when considering related party disclosures.
ICAEW TECH 03/11
This is sector-specific guidance relating to residential service charge accounts.
It is an important starting point when considering the preparation and presentation of service charge financial information.
The Property Institute Guidance
The Property Institute also provides best-practice material relating to residential property management and service charges.
This can provide more practical explanations about the expectations around service charge accounting and disclosures.
UK Financial Reporting Principles
Accountants also use concepts drawn from UK financial reporting frameworks such as FRS 102 and FRS 105 when thinking about related party relationships and disclosures.
We're not suggesting that managing agents need to sit down and read accounting standards.
But it is useful to understand why accountants use particular terminology and why they ask certain questions.
Who Counts as a Related Party?
This is where many people define related parties too narrowly.
To make it easier, we think of related parties in three broad categories:
People
Businesses
The managing agent and its wider group
Let's look at each one.
1. Related People
CJ:
The first category is people.
That can include:
RMC directors
The landlord
Directors of a corporate landlord
Key decision-makers
Close family members
Household connections
When you're taking on a new supplier, you should ask whether they have any relationship with the directors, landlord or key people involved with the site.
Ray:
And be specific.
If you simply ask:
“Are you related to anybody?”
people may not understand the scope of the question.
You might need to ask:
Are you the spouse, partner, child, parent or close family member of a director, landlord or key decision-maker?
Clear questions produce clearer answers.
2. Related Businesses
CJ:
The second category is businesses.
A director might own or control another company.
That company could then provide services to the development.
Similarly, a director's spouse, partner, parent or other close connection might own or control a company supplying services.
That business may therefore need to be considered a related party.
The relationship doesn't always have to be obvious.
There may also be situations where somebody has an interest in a company without being the most visible person involved.
3. Managing Agent Related Parties
The third category concerns the managing agent itself.
This is particularly important because of the trust placed in managing agents when they are spending and managing client money.
A large managing agent may have several companies within the same corporate group.
For example, another group company might provide:
Tax services
Company secretarial work
Administration
Maintenance
Gardening
Repairs
Other services to the development
If the company providing the service is connected to the managing agent, that relationship should be considered.
The same applies if a director or manager of the managing agent owns a separate business that is then used to provide services to clients.
Commissions, Referral Fees and Rebates
CJ:
Managing agents also need to be very aware of:
Commissions
Referral fees
Rebates
Administration fees
Other financial benefits linked to suppliers
Transparency is critical.
It's not automatically saying that these arrangements should never exist.
But clients need to understand what is happening.
Ray:
For example, imagine a managing agent regularly uses the same insurance provider.
If that provider is significantly more expensive than alternatives and the managing agent receives a referral fee, that could create serious questions if it hasn't been disclosed.
You can't assume that because one or two RMC directors know about the arrangement, everybody who relies on the service charge accounts understands it.
The accounts need to give appropriate transparency.
A useful rule is:
If a leaseholder would raise an eyebrow if they knew about it, it probably deserves disclosure and a proper paper trail.
How Managing Agents Can Build Related Party Checks Into Their Processes
Knowing what a related party is isn't enough.
You also need a process to make sure related party relationships are identified consistently.
One of the biggest mistakes is only thinking about related parties at year end when the accountant asks.
Instead, build related party questions into several stages of your normal workflow.
Ask About Related Parties When Onboarding a New Client
When taking on a new development, ask whether there are any existing relationships between:
Directors
Landlords
Key decision-makers
Suppliers
Contractors
Businesses connected to those people
You want to identify ongoing arrangements from the beginning.
Ask About Related Parties When Onboarding Suppliers
This is equally important.
Every new supplier onboarding process should include a related party question.
Ask whether the supplier is connected to:
Any RMC director
The landlord
Any resident with decision-making influence
Staff or directors of the managing agent
Any other relevant person involved in appointing suppliers
This means you identify the relationship before significant transactions start occurring.
Include a Related Party Check at Year End
The third place to include the question is in your service charge year-end checklist.
When preparing the year-end information for your accountant, include a final confirmation:
Have there been any related party transactions during the year?
That gives you one last opportunity to identify anything that may have been missed earlier.
Questions to Add to Your Related Party Checklist
If you're creating a checklist or questionnaire, consider including questions such as:
Do any directors, company secretaries or key decision-makers have an interest in any suppliers used by the development?
If yes, request additional information.
Are any contractors connected by family or ownership to directors or staff?
This could include spouses, partners, parents, children or businesses they own or control.
Are there any commissions, referral fees, rebates or administration fees linked to suppliers?
If yes, understand who receives the money and why.
Have any directors or connected people been reimbursed from service charge funds?
If so, identify what the reimbursement related to.
Have there been any loans, advances or temporary funding arrangements between entities?
This can be especially important where a managing agent handles money across multiple developments.
You need to ensure that funds aren't effectively being moved between developments without appropriate control, documentation and transparency.
Related Party Transactions Aren't Automatically Wrong
An important point throughout this episode is that identifying a related party doesn't automatically mean something improper has happened.
The focus is on transparency.
If a connected supplier has been properly appointed, offers good value and the process has been handled fairly, that may be perfectly acceptable.
But people need to know about the relationship so they can understand the transaction and be satisfied that there wasn't inappropriate influence.
Keep Evidence – Not Just Answers
Once you've built the questions into your processes, you also need to keep evidence.
A simple “yes” or “no” isn't necessarily enough if somebody asks questions later.
Good record keeping gives you something to rely on.
Keep a Complete Supplier List
Maintain a full supplier list for each development.
Keep a record of any supplier changes during the year.
If somebody comes back several years later and asks about related party transactions, you'll be able to demonstrate which suppliers were actually engaged at the time.
Keep Invoices, Contracts, Quotes and Tender Records
If a supplier is potentially related or connected, make sure you retain:
Invoices
Contracts
Quotes
Tender documentation
Procurement records
Approvals
You should already be retaining much of this information as part of normal good property management.
The important thing is recognising that these documents can also provide evidence that a related party supplier was appointed on reasonable terms.
Tender and Quote Evidence Can Be Particularly Useful
CJ:
If you're doing major works, you would usually be obtaining tenders or quotes anyway.
Likewise, if you're making a significant change to a landscaper, cleaner or another major supplier, you'd often obtain alternative quotes.
It's really about making sure those records are retained properly.
It doesn't necessarily create a huge additional administrative burden.
Keep Board Minutes and Written Approvals
Another useful piece of evidence is board minutes and written approvals.
If decisions were formally approved, retain the records showing:
Who made the decision
What was approved
When it was approved
Whether conflicts were declared
What alternatives were considered
These records can become extremely valuable if questions arise later.
Keep Related Party Declarations
If you ask directors or other relevant people to complete an onboarding declaration and they confirm that they are not connected to any suppliers, retain that declaration.
If a relationship is disclosed, keep that evidence too.
This gives you a record showing what you were told at the time.
When Does a Related Party Transaction Need to Be Disclosed?
CJ:
A good rule of thumb is:
If there's a connected party and money or another financial benefit is flowing, it needs to be considered for disclosure.
If a related person or company exists but there have genuinely been no transactions with them, there may be nothing to disclose in the service charge accounts.
The important trigger is the transaction or benefit.
What Should Be Disclosed?
The aim isn't simply to tick a box saying:
“Related party transaction occurred.”
The disclosure should give the reader enough information to understand what happened.
Let's look at several practical examples.
Scenario 1: A Connected Contractor Provides Services
Imagine a company connected to an RMC director provides gardening, cleaning or maintenance services.
A useful disclosure should include:
The nature of the relationship
What goods or services were supplied
The total value of the transactions during the year
For example:
The gardening contractor is a company controlled by a director of the RMC. Gardening services totalling £X were provided during the financial year.
You should also retain supporting evidence showing how the price was determined.
For example:
Was there a tender?
Were several quotes obtained?
Was the pricing compared with market rates?
That level of detail may not always need to appear in the service charge accounts themselves, but it should be available if the appointment is questioned.
Scenario 2: Commission, Referral Fee or Rebate
Suppose the managing agent or a connected group company receives some form of commission, referral fee or rebate.
The information you should understand includes:
What type of arrangement it is
Who received the payment
The amount involved
Whether the amount was retained
Whether any amount was credited back to the service charge
How the arrangement was authorised or communicated
CJ:
For example, the managing agent itself might not receive the money directly.
A related company within the wider group might receive the benefit.
That still needs to be considered.
If the benefit is passed back into the service charge, that should also be clear.
Scenario 3: A Director Is Reimbursed for Expenses
This is another area that can easily create questions if it isn't explained.
Imagine an RMC director personally pays for new signage and is later reimbursed from the service charge bank account.
The transaction may be completely legitimate.
But when a leaseholder sees money leaving the bank account and being paid directly to a director, they're likely to ask what happened.
A simple disclosure can prevent unnecessary suspicion.
You could disclose:
The relationship
What the reimbursement was for
The amount
For example:
An RMC director was reimbursed £X for signage purchased on behalf of the development.
The Minimum Related Party Disclosure
A useful minimum disclosure generally explains:
What is the relationship?
What was the transaction for?
What was the amount?
Add more information where it is necessary for the reader to understand the transaction properly.
Common Related Party Red Flags for Managing Agents
Let's look at some practical warning signs.
These don't necessarily prove anything is wrong.
They simply indicate that you should stop, ask questions and make sure the documentation is in place.
Red Flag 1: The Same Contractor Is Used Across Multiple Blocks
Using the same contractor across many developments is not inherently a problem.
There may be good commercial reasons for doing so.
Perhaps the managing agent has negotiated favourable rates because of the volume of work.
But if the supplier is connected to the managing agent and is repeatedly appointed without evidence of procurement or market testing, questions may arise.
For example, if the same insurance provider appears across multiple blocks and the managing agent receives a referral fee, make sure there is appropriate transparency.
Red Flag 2: Emergency Work Always Goes to the Same Connected Supplier
CJ:
If there are genuine emergency works, you sometimes need somebody immediately.
But if every emergency always seems to go to the same connected contractor, it may be worth reviewing the pattern.
Ray:
Again, the issue isn't necessarily using the same supplier.
The issue is whether you're able to demonstrate that the arrangement is appropriate, properly documented and on reasonable terms.
Red Flag 3: Vague Invoices From Connected Suppliers
Be cautious where a connected supplier submits invoices with descriptions such as:
Admin support
Consultancy
Management services
without clearly explaining what was provided.
Vague narratives can make it difficult for leaseholders, managing agents and accountants to understand what the service charge actually paid for.
Connected party invoices should be clear.
Red Flag 4: Group Companies Charging Without Clear Explanations
A managing agent may operate within a larger group.
There's nothing automatically wrong with another group company providing services.
However, if group companies are charging developments and there's little clarity about what they're doing, that can create problems.
Intercompany relationships need transparency.
Red Flag 5: Similar Names or Addresses
A contractor with the same surname, similar address or other obvious connection to a director or managing agent employee may warrant further investigation.
It might be completely innocent.
But it can be a useful trigger to ask the related party question.
Red Flag 6: Undocumented Payment Approvals
If payments are approved without a proper paper trail, this can create difficulties later—particularly if the recipient turns out to be a connected party.
Make sure approvals are documented.
That helps show that decisions were properly reviewed and authorised.
The Three Cs: Catch, Confirm, Communicate
A simple way to think about related party transactions is through the three Cs:
1. Catch
Identify the relationship early.
Build related party questions into:
Client onboarding
Supplier onboarding
Your annual service charge year-end checklist
Don't wait for the accountant to ask.
2. Confirm
Make sure you have the evidence.
Keep:
Supplier lists
Contracts
Invoices
Quotes
Tender documentation
Board minutes
Written approvals
Related party declarations
You want a clear paper trail.
3. Communicate
Disclose the transaction clearly.
Don't hide it.
Explain:
The relationship
What the transaction was for
The value involved
Transparency helps protect trust.
If You Feel You Need to Hide It, Ask Why
CJ:
If you feel like you want to hide something, that's probably a sign that there's a problem.
There shouldn't be anything about a related party arrangement that you feel uncomfortable explaining.
That doesn't automatically mean the arrangement is wrong.
But if you're reluctant to disclose it, that's a good reason to stop and consider whether the process is appropriate.
A Practical Related Party Checklist for Managing Agents
When reviewing related party transactions, ask:
People
Are any suppliers connected to RMC directors?
Are they connected to the landlord?
Are they connected to key decision-makers?
Are they close family members or household members?
Businesses
Does a director own or control any supplier?
Does a spouse, partner or close family member own a supplier?
Is there an indirect business interest?
Managing Agent
Does the managing agent own or control the supplier?
Is the supplier another company within the managing agent's group?
Do directors or employees of the managing agent own the supplier?
Is the managing agent receiving a commission, referral fee or rebate?
Documentation
Is there a complete supplier list?
Are invoices retained?
Are contracts retained?
Are quotes or tenders available?
Are approvals documented?
Are related party declarations retained?
Disclosure
Is the relationship explained?
Is the nature of the transaction clear?
Is the value disclosed?
Is any commission or rebate clearly explained?
Would a leaseholder understand what happened?
Why Related Party Transparency Matters
Related party disclosures aren't simply an accounting exercise.
They are about trust.
Leaseholders are contributing money to maintain and manage their development.
They want confidence that those funds are being spent fairly and that suppliers are being selected for appropriate reasons.
Clear related party processes help managing agents demonstrate:
Transparency
Proper governance
Good procurement
Fairness
Good record keeping
Appropriate financial controls
It can also reduce questions and delays when the service charge accounts reach the independent accountant.
Make Related Parties Part of Your Standard Process
The most important takeaway is not to treat related party transactions as something you only think about once a year.
Build the checks into your normal way of working.
When you onboard a new development, ask the questions.
When you onboard a new supplier, ask the questions.
When you prepare the year-end accounts pack, ask again.
Then retain the evidence and make sure the disclosure is clear.
That turns something which can easily become a year-end problem into a normal part of good managing agent governance.
LISTEN HERE
Want to hear Ray and CJ discuss related party transactions in service charge accounting in more detail?
Follow Qube Talk for more conversations covering service charge accounting for managing agents, related party transactions, RMC accounting, residential block management, year-end accounts, bookkeeping and financial controls.
Why Not Get in Touch With the Team at Qube Accountants?
Are you a managing agent unsure about related party transactions, service charge disclosures or year-end accounting requirements?
Perhaps you've identified a connected supplier, commission arrangement or director reimbursement and aren't sure how it should be presented in your service charge accounts.
Why not get in touch with the team at Qube Accountants?
We specialise in service charge accounting for managing agents and understand the accounting and reporting challenges involved in residential block management.
Whether you need help with:
Service charge account preparation
Independent reviews
Related party disclosures
Year-end accounting processes
Improving your financial controls
Reviewing the information provided to leaseholders
our team would be happy to discuss how we can support you.
This article is based on a Qube Talk podcast discussion and is intended as general information. Individual developments, leases, accounting requirements and circumstances vary, so appropriate professional advice should be obtained where required.
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