Do flat management companies pay Corporation Tax on service charges?
Short version. A flat management company can have taxable income, but qualifying variable service charges and sinking funds held on trust under section 42 of the Landlord and Tenant Act 1987 are not the company's income. The lease and who pays the charges matter.
1. Separate trust funds from company income
Section 42 can apply to variable service charges paid by tenants of residential property under their leases for services, repairs, maintenance, insurance or management. Qualifying contributions and sinking funds are held on trust. The company is not beneficially entitled to those receipts, so they fall outside its Corporation Tax calculation. Section 42 does not apply where the funds are paid by freehold owners or the landlord is an exempt landlord.
Rent is generally taxable property income. Other income that belongs to the company can also be taxable. Investment income on trust funds is chargeable on the trustees instead. HMRC says mutual trading does not apply to a property business. HMRC also notes that it may treat a flat management company as dormant.
2. Check the result
For example, a company might collect £24,000 of qualifying variable service charges into a trust fund and receive £1,200 of rent in its own name. The £24,000 is not its income under the trust treatment, while the rent is generally property income. Check the lease and the full statutory conditions before preparing the company's figures.
If you are filing an active company with SimpleCompanyTax, you can declare property management company code 7 on Financial data. The dormant journey does not offer that box 4 choice yet. Follow the box 4 filing steps.