For years I've prepared accounts for a small flat management company, which include a Service Charge and Sinking Fund contributions. Service charges have always been based on expenses incurred, rather than a fixed provision, so in theory profits don't arise. The company is "dormant" for CT purposes. The management now want to charge a fixed amount, and this will give rise to a profit, which means no dormancy. Can I transfer the surplus to a general reserve to meet future costs and thereby avoid CT? Alternatively can I increase the contributions to the S/F to reduce the "profit"? Your thoughts on this?
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It depends.
I'm assuming that, when you say that the company is dormant, you regard the transactions that it makes as being on behalf of the tenants. In which case, what's changed?
I'm not seeing how your logic works.
I usually transfer all 'maintenance charges' into a Reserve Fund being held on behalf of tenants (Not Company Reserves as the funds do not belong to the Company) and then after preparing the Income & Expenditure (without income), an amount is transferred out of the Reserve Fund into the I & E Account of exactly the same amount as the expenditure to leave a nil surplus/deficit. No profit therefore arises.
You can have a sinking fund that is specifically for a particular purpose (roof replacement) and/or a Reserve Fund for any purpose, but these are not monies that belong to the Company. A point overlooked by many flat management companies like this is that usually the Directors are legally obliged to look ahead and build up funds for future costs perhaps up to 10 years ahead so that later tenants do not have large bills to pay out of the blue, but such provisions are rarely actually made.
The only thing to watch out for is that if reserve monies are held in a deposit account and interest is earned, the Company may have to submit a Trust Tax Return as well as a CT Return as the monies are being held in Trust for the tenants (probably the leaseholders) for the time being.
This may not be appropriate for all circumstances but this may help you.
I agree with Lion.
Nothing has changed.
If you think the sinking fund belongs to the management company, who owns the management company?
And why do you think the sinking fund belongs to the management company and not the lessees?
I wasn't familiar with that list, 356B. I agree that a large deposit of say £50,000 might trigger a tax bill of over £100, but what I meant was the nature of the management company is such that it doesn't trade for profit. Is the guidance an accurate statement of the law?
Do the leases permit the management company to change the basis of charging to a fixed amount? Come to that, is it correctly charged now?