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Where Taxpayers and Advisers Meet

Sinking Fund and surpluses.

pawncob
Posts:4608
Joined:Wed Aug 06, 2008 4:06 pm
Location:West Sussex
Sinking Fund and surpluses.

Postby pawncob » Wed Feb 17, 2021 1:42 pm

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?
With a pinch of salt take what I say, but don't exceed your RDA

bd6759
Posts:3518
Joined:Sat Feb 01, 2014 3:26 pm

Re: Sinking Fund and surpluses.

Postby bd6759 » Sat Feb 20, 2021 5:50 pm

Flat management companies aren't usually trading companies and don't usual generate profits. They may have a surplus of receipts over expenditure, but no trading profits. All monies held by the company are done so on trust for the owners/lessees.

pawncob
Posts:4608
Joined:Wed Aug 06, 2008 4:06 pm
Location:West Sussex

Re: Sinking Fund and surpluses.

Postby pawncob » Mon Feb 22, 2021 12:02 pm

Accepted that the company can charge an amount in excess of costs and the excess funds are held as a reserve Account. Some contributors assert that the funds are held on trust and don't belong to the company. They state that any interest should be included on a Trust return to HMRC and not subject to CT. HMRC seem to disagree: https://www.gov.uk/set-up-property-management-company

Legal opinion states that the funds are held in trust for the tenants, but the tenants have no claim on the funds (This is a bit Irish!). If they sell the flat the funds stay with the company.
HMRC seem to think that interest earned by the company is subject to CT.

Is there an accepted position on this?
With a pinch of salt take what I say, but don't exceed your RDA

bd6759
Posts:3518
Joined:Sat Feb 01, 2014 3:26 pm

Re: Sinking Fund and surpluses.

Postby bd6759 » Mon Feb 22, 2021 8:50 pm

The company can only charge what its articles allow it to charge. That amount will be controlled by the leases.

What makes you think that HMRC does not agree that such a company is not trading? HMRC, contributors and legal opinion all agree that the pooling of monies to meet liabilities is not a trade, and even if it were it would be mutual trading. The link you provided doesn’t suggest anything different.

The money is collected to meet future or current liabilities, therefore it is held in trust. Ignoring your racist comment, there is nothing curious about the tenants not having a claim on the funds (insofar as the funds exceed their proper contribution). For example, the assets of any mutual association are held on trust for the benefit of its members, but no member of a club has a claim over those assets, especially after they cease to be a member.

Given the discussions in an earlier topic about trusts, I wonder if all such companies will now need to register as trusts?

pawncob
Posts:4608
Joined:Wed Aug 06, 2008 4:06 pm
Location:West Sussex

Re: Sinking Fund and surpluses.

Postby pawncob » Tue Feb 23, 2021 11:54 am

It cannot be a "racist" comment as you don't know my ethnicity. If I am white (NOT Caucasian), it is at worst culturist, reflecting the stereotypical view of Irish people, and actually, an aphorism.
With a pinch of salt take what I say, but don't exceed your RDA

bd6759
Posts:3518
Joined:Sat Feb 01, 2014 3:26 pm

Re: Sinking Fund and surpluses.

Postby bd6759 » Wed Feb 24, 2021 3:34 pm

Pawncob. My apologies. I don’t disagree with that at all. I tend to subscribe to the theory that racism is meaningless because it presupposes there is more than one human race. The term has been distorted and is now used as general put down to suppress opinions. I fell into that trap, and I am sorry.


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