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HMRC tries to simplify flat service charge regime

25th Aug 2011
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New guidance from the taxman on how property and “flat management” companies should present their accounts has confused accountants, reports Nick Huber.

HMRC has updated its guidance on rental income, savings income and dividends in its Trusts, Settlements and Estates Manual. The changes cover two areas:

  1. A updated form 17 Declaration of beneficial interests in joint property income now includes a stipulation that evidence of beneficial interest be provided. Previously HMRC had asked for evidence only in the case of bank and building society interest. The evidence requirement now applies to declarations in respect of all types of property, the ICAEW Tax Faculty explained in a blog post on the subject last week.
  1. There are also new procedures governing the filing requirements for flat management companies under the new regime. The changes means that property and flat management companies that collect service and maintenance charges from tenants and hold them in interest-bearing trust accounts may have to do more admin, although there are signs that HMRC is trying to lessen the burden.

Under Section 42 of the Landlord and Tenant Act (LTA) 1987, property and flat management companies who are paid service charges and “sinking funds” for maintaining should pay the money into a trust fund, and notify HMRC of the fund.

New sinking or service charge funds that confirm by letter that there is no other income source other than interest paid net of tax will not need to complete annual tax returns in future, HMRC said in guidance published in December 2012.

For existing companies, from 2009-10 onwards, HMRC Trusts & Estates will consider returns relating to funds gaining net interest for “dormant” status and inform them by letter. Accounts receiving gross interest can be switched to net interest payments to qualify for the same filing concession.

“Banks and building societies will need to hold evidence that a company is acting as a trustee before they begin making net payments,” HMRC advised. “As there is no Trust Deed we suggest that banks etc. obtain a signed declaration from the company certifying that the funds to be held in the bank account are, under s42 LTA 1987, held by the company in its capacity as a ‘trustee’ of a trust to hold service charges.”

All clear? Some members are anything but and confusion over rules for flat management accounts is making it difficult for accountants to answer clients’ questions.

In a post in July Zarathrusta said he thought service charges should be treated as money held on trust, and therefore appear outside of the accounts of the flat management company, along with all of the expenses, even if these have gone through the company bank account.

However, he was still unsure about whether dormant accountants can be prepared for the management company, and whether the company should prepare a Trust return for HMRC.

In another thread the same week, Colinwain said a flat management company client had recently asked how the company’s accounts and tax return should be prepared.

“The director's recent question was along the lines of ‘I have read that my company's accounts should be prepared as dormant, the bank account and service charges should be treated as a Trust outside of the company, and the company should be preparing Trust tax Returns not corporation tax returns - why aren't we doing this?’”

Guidelines on flat management companies on the Companies House website say that "many companies choose to include the income and expenses in their accounts", Colinwain added. “This implies that there is a choice.”

HMRC’s website, meanwhile, does not clearly define when a company is covered by the Landlord & Tenant Act.

“HMRC have seen many of our companies’s accounts, but not once have they mentioned the need for Trust Return,” he said. “Can anyone please give me a definitive answer, or point me in the right direction?”

Looking at the wider context, UKtaxpal and Paul Scholes pointed out that the confusion stems from government plans to abandon plans to implement regulations requiring service charge accounts to be held in designated accounts.

These provisions were included in the 2002 Commonhold and Leasehold Reform Acts, but were abandonded by the Coalition government to minimise bureaucracy. Instead, confusion now reigns.

According to the ICAEW, the underlying point to bear in mind is that a flat management company does not “own” the transactions relating to service charge expenditure and the collection of monies from the leaseholders/tenants. Under s42 of LTA1987 service charges are regarded as funds held on trust for the leaseholders.

Several interesting suggestions were put forward in the two Any Answers threads, most of which seem to have satisfied the authorities to date. But so far no one has provided a definitive answer to Zarathustra’s question whether to prepare dormant accounts for management companies or not.

Further reading

Replies (4)

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By uktaxpal
26th Aug 2011 12:12

No Trust.Need to satisfy two purposes.

There is no trust.The term "Trust" is only a LTA 87 definition.HMRC are confused.The important point is to satisfy the service charge accounts provisions contained in LTA 87 thereby charging residents only expenditure provided for in the lease.To issue only full companiies act accounts does not fullfil the requirement unless the accounts differentiate between service charge income and expenditure and non service charge expenditure.Two sets of accounts may be required.

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By Paul Scholes
26th Aug 2011 17:45

Don't think HMRC are confused, that's our job

HMRC's guidance & requirements on this came out around 1999 in a tax bulletin in order to try to deal with previous confusion whereby S42 service charge money and its interest were being declared in company accounts.

This guidance was repeated by the main property letting agents regulatory bodies as well, I think by ICAEW & ACCA.  From my experience the confusion has come about because this was never given the publicity it deserved and there was nothing to force the issue, allowing agents & accountants to turn a blind eye or, in the majority of cases, act in ignorance.

What has sparked this latest publicity has been ICAEW's decision to finally get the thing back into the light of day and go the whole hog with guidance over accounts prep for service charges.

What confuses me is how there is still any dispute over the case that S42 service charge money is not owned by the person or thing receiving it.  Consequently it should not appear as that person's or thing's income & expenditure.

The original tax bulletin now spans several pages of HMRC's manual TSEM5700 onwards.




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By Ian McTernan CTA
30th Aug 2011 10:21

Drowning in meaningless regulations...

Another fine example as to why doing anything in this country is so complicated - small wonder 20% of the workforce is employed looking after the rest of us.

Wish the Revenue/politicans/central and local government would stop sticking their oar in to businesses and actually let us get on with running them and trying to keep our heads above water.

Whatever happened to being able to present accounts without needing 'guidance' on every miniscule aspect of every business on the planet?

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By lisler
31st Aug 2011 00:08

Flat Management Companies

More confused now I've revisited the topic

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