I am one of the three directors of a limited company set up in 2013 to manage the freehold of a house converted into three flats. Each director has a one-third share of the freehold, and each owns one of the three flats. Two of the flats are let out. One is lived in by its owner, who is one of the three directors of the freehold management company.
The limited company has a bank account. The three directors pay service charges into the account designed to cover the costs we have incurred in the previous year, PLUS enough to build the bank account by £1000 each year. Thus, if we spend £3000 in year A, we will pay £4000 as service charges into the account in the same year. As I write we have roughly £5000 in the bank. We view this money as being the sinking fund. All of a sudden, our accountant has said "Oh, you made a profit last year of roughly £1000, so that is taxable." The "profit" is the amount we have put in to the bank above and beyond our expenses, to grow the sinking fund. I am sure she is wrong and that our freehold company is free from tax because:
• The company’s business consists of the management, on a non-profit making basis, of flats for the owners of the flats
• The company pays no dividend or makes any other distribution of profit
• The company is not trading – just looking after the freehold building
• The only income received by the company is the service charges paid by the property owners
• The income is expended on the day to day maintenance and management of the building
• Surplus income is transferred to deferred income for future maintenance expenses
Can anyone advise, please?
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