According to HMRC’s SAM100320:
“A property / flat management company may also be liable to income tax at the rate applicable to trusts where investment income arises on residential service charges (known as sinking funds) held in a designated account. This is a requirement of S42 of the Landlords & Tenant Act 1987.”
A service charge trust fund (per S42 of the Landlord and Tenant Act 1987) has received over £1k from finance charges imposed on arrears (in accordance with the lease).
HMRC guidelines seem to state that investment income only is taxable.
Would you say that a finance charge levied on arrears of service charges is taxable investment income?
Your advice would be gratefully received.
Replies (13)
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Excuse the impertinence but it is a little worrying that you quote the SAM guidance which is directed, primarily, at the clerical staff in HMRC who are responsible for setting up records on the SA system.
If you wanted to view technical guidance, it is more likely to be found in the Trusts, Settlements and Estates manual.
As ever, the correct answer will depend on the facts but my, limited, understanding is that, management companies within S42 are likely to be trusts. The annual contributions they receive are capital and not taxable. However, any interest etc received on the investment of those funds is chargeable at trust rates.
To determine whether the "finance charges" you describe, are comparable to interest or something else, you will need to know exactly what the rules, under which they are paid, say about them.
If the sums are comparable to interest, I suspect they will be taxable at the trust rates but, as I say, you will need to consider all the facts and look at the correct bit of HMRC guidance (if you are looking for their take on matters).
I suspect s42 (and indeed TSEM) is a red herring. I think the question to ask is simply whether it's income. When tax-free payments are supplemented by "ex gratia" pop-ups for lateness, the top-ups have tax deducted (or used to - haven't seen one for a while) because they're classed as income.
As whitevanman says, have a look at the rules and have a look at how the charges are determined.
Don't agree the red-herring comment.
S42 covers most typical, flat management etc, companies. It sets the rules. If established in accordance with S42, it is likely the entity will be a trust and the annual contributions will be capital payments to that entity (hence not taxable).
The rest follows the taxable status of the entity.
Income tax is a tax on income. The first question is whether it's income. That's not determined by s42 or TSEM, so I do think those are red herrings vis-à-vis that question. I'm not surprised if it is income, as it sounds, but I think you knew that already.
Question 2 is what is the rate of tax. There, s42 (and TSEM) are immediately relevant. Given that the figure has increased since your TMEs question, so the trust rate will apply to the excess over £1k, the answer to that question becomes more important. It's no longer "who cares?" (or whatever it was I said) as there will be a measure of tax relief.
I wonder whether wvm would agree with (the rest of) my response on that thread?
Here:
https://www.accountingweb.co.uk/any-answers/service-charge-trust-fund-an...
Sorry, Steadfast, I see you did say "over £1,000" before. I either misread it then (my suspicion) or am misremembering my thought process now.
It is income because it can be accumulated (added to capital)? Weird logic. What would happen to it if it wasn't income?
However I missed that you'd called it interest - even in your sub heading (I'm not doing very well with my reading/comprehension skills on your threads!) - and as interest is income, I'm not going to argue your conclusion.
Yes, TMEs could reduce 45% to 20%. Note that the costs are grossed up, which helps.
Sorry, busy day and did not see this earlier (nor in fact did I see the previous thread).
I would indeed agree your comments. I think Steadfast has also, now, arrived at the same conclusion from dragging through the mire of the HMRC Trusts etc manual - not an easy feat.
Thanks wvm. In my turn, I missed that you had commented before I replied above just now.
I need a holiday.