Question: I’ve recently purchased the leasehold on a flat in a block where the freehold is owned by a limited company and I have been asked to pay service charges in to the company in order to maintain the building.
The existing directors have also asked me to become a company director and have said that I may have to approve a set of accounts and a tax return, is this right? If so what am I responsible for as a director and why would we need to pay any tax?
Mr R of St Leonards on Sea
It sounds like you are being asked to become a director of a freehold management company; details of directors responsibilities such as the filing of company accounts and tax returns can be found at https://www.gov.uk/running-a-limited-company. It is quite common for people to be asked to join as a director of a company where they own a leasehold property that is managed by a freehold management company, so there is no need to be alarmed by this request.
Regarding the tax position, as a limited company registered in England and Wales it will be obliged to pay Corporation Tax on income that it receives. However, the service charges that you have mentioned are not deemed to be income for the company, as the company will be holding this money on behalf of the leaseholders and will then pay it out for services, such as cleaning, communal lighting, repairs to the building, etc. Therefore, no Corporation Tax will be payable on the service charges that are paid in to the company bank account.
There are situations where the company would be liable for Corporation Tax, particularly if the company is sitting on a large amount of funds on behalf of the leaseholders and is receiving interest on these amounts. The interest received would be deemed as taxable income for the company and it would need to submit a Corporation Tax return and pay over Corporation Tax on these amounts.
However, if the interest received by the company is less than £100 per annum, you are able to contact HM Revenue & Customs in order to get the company made dormant for Corporation Tax purposes, which would remove any requirement to submit Corporation Tax returns and pay over Corporation Tax. If this is something your directors have already done they must keep an eye on the amounts of interest received, as if this goes over £100 then they will have to notify HM Revenue & Customs and start submitting Corporation Tax returns and paying Corporation Tax.
If you would like to discuss this in more detail or require any assistance with the preparation of the financial statements and corporation tax return, please contact Martin Copland on 01424 720222 or email him at firstname.lastname@example.org.