Do residents’ management and RTM companies pay corporation tax on service charges?
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Every limited company has to file accounts with Companies House, including residents’ management and RTM companies. Service charge and sinking fund money is held on trust and, according to HMRC, falls outside corporation tax. Only the company’s own income, such as ground rent or fees it charges, is taxable.
Accounts at Companies House
GOV.UK guidance is clear that all limited companies must file accounts, even if they are dormant, and says so for flat management companies specifically. A resident-run building company that collects service charges and pays bills has had transactions, so it isn’t dormant for company-law purposes.
Service charges are trust money
Under section 42 of the Landlord and Tenant Act 1987, service charges that vary with costs, and sinking fund contributions, must be held on trust by whoever they are paid to. That includes a residents’ management company, an RTM company, or a company that owns the freehold, because none of them is an “exempt landlord” (a term that means public bodies and social landlords).
The ICAEW’s technical guidance for accountants says this trust money should not be shown as an asset of the company in its statutory accounts. How the transactions appear in the profit and loss account is less settled, so accountants present it in different ways.
What HMRC says about corporation tax
HMRC’s Property Income Manual (PIM1075) says that service charges and sinking fund contributions received by a flat management company are outside the scope of corporation tax because the company isn’t beneficially entitled to them. If interest is earned on those funds, it is taxed on the company as trustee, not through corporation tax. HMRC’s Trusts manual (TSEM5710) says income from service charge funds is exempt from the higher trust rates, and that a trust with income of up to £500 in a tax year does not report to HMRC or pay tax on it. Above £500 it is reported, and tax is due on the whole amount.
Money the company receives in its own right is different. Ground rents and other rents, or fees charged to leaseholders for things like sales information packs, remain taxable property income. The small profits rate of corporation tax is 19% on profits up to £50,000 (the limits are reduced for short accounting periods and for associated companies).
The same manual notes that HMRC may treat a flat management company as dormant for corporation tax purposes. If HMRC sends you a notice to deliver a company tax return, follow it, even if no tax is due.
In practice
- File annual accounts with Companies House. Most small building companies prepare micro-entity accounts.
- Keep the service charge account separate from the company’s own money.
- Treat ground rent and other income of the company as taxable, and tell HMRC about it.
- Tell HMRC about interest on service charge or reserve funds, which is taxed as trust income.
This is general information based on published HMRC and GOV.UK guidance, not tax advice. Companies with significant own income, or unusual arrangements, should take advice.
How Tiny Freeholder helps
Tiny Freeholder keeps the service charge account separate from the company’s own income, and prepares the company’s micro-entity accounts and its company tax return from your records, treating service charge money as trust money and taxing only the company’s own income.