Flat management and surpluses

General reserve question.

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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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RLI
By lionofludesch
18th Feb 2021 13:09

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.

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Replying to lionofludesch:
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By 356B
18th Feb 2021 15:32

As a flat management company, HMRC have determined it is "dormant" for tax purposes ( as long as it qualifies. see:https://www.gov.uk/set-up-property-management-company

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Tornado
By Tornado
18th Feb 2021 13:22

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.

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Replying to Tornado:
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By 356B
18th Feb 2021 16:31

That may solve my problem. However I think the S/F belongs to the management company not the tenants. The deposit account is in the name of the company, with a trust deed acknowledging tenants' interest, but tenants have no legal right to the funds.

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Replying to 356B:
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By thevaliant
18th Feb 2021 16:58

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?

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Replying to thevaliant:
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By 356B
18th Feb 2021 17:36

It's a £100 company, with the majority owned by the freeholders. Lessees only have a nominal shareholding. When a lessee sells their property the funds stay with the company to meet potential future expenses.

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Replying to 356B:
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By Paul Crowley
19th Feb 2021 07:52

Nothing belongs to the management company
All held in trust for the members

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By Jo Nokes
18th Feb 2021 14:59

Surely the company is not trading, for corporation tax purposes

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Replying to Jo Nokes:
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By 356B
18th Feb 2021 15:30

https://www.gov.uk/set-up-property-management-company

It could be if it doesn't comply with the limits.

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Replying to 356B:
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By Jo Nokes
18th Feb 2021 16:57

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?

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By cbp99
19th Feb 2021 13:34

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?

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