A residents’ management company or RTM company is an ordinary company for corporation tax, but the service charges it collects under the leases are usually trust money under section 42 of the Landlord and Tenant Act 1987 and are not its income. Its own receipts, such as ground rents, roof licence fees and lease extension premiums, are taxable, and mutual trading cannot shelter them. HMRC will often treat a pure management company as dormant for corporation tax, but Companies House filing continues every year.

What kinds of company manage blocks of flats?

GOV.UK describes a flat management company, sometimes called a Right to Manage company, as a limited company set up so residents can jointly run a property such as a block of flats. In practice there are three common forms.

  • RTM company. Under section 73 of the Commonhold and Leasehold Reform Act 2002, this must be a private company limited by guarantee whose articles state that an object is acquiring and exercising the right to manage the premises. It does not own the building. If the freehold is transferred to it, it stops being an RTM company.
  • Residents’ management company (RMC). Usually a party to the leases with management obligations, which may be limited by shares or by guarantee, with the leaseholders as members. It may or may not own the freehold.
  • Share of freehold company. A company owned by the leaseholders that has bought the freehold, so it is also the landlord.

The tax rules are the same for all three. What changes the answer is whether the company owns an interest in the building and what income it receives in its own right.

Does the company pay corporation tax on the service charges?

Normally not. PIM1075 explains that service charges and sinking fund contributions within section 42 fall outside corporation tax because the payee is not beneficially entitled to them; the company receives them as trustee. ICAEW’s TECH 03/11 records HMRC’s confirmation that, provided the trust terms are observed, receiving these charges creates no tax liability for the payee. Section 42 needs variable charges payable under the leases by tenants of dwellings whose landlord is not an exempt landlord; if those conditions are not met, the general rules apply and the charges may be property income. The detail is covered in service charges and sinking funds.

Interest on the trust money is also kept out of the company’s tax return. TSEM5712 says the company receives that interest as trustee, so it is outside corporation tax and taxed instead as trust income on a trust return.

Can mutual trading make the company’s surplus tax free?

Not for property income. Mutual trading allows a body to trade with its own members without tax on the surplus, but HMRC’s Business Income Manual at BIM24782 says that if a property management company is carrying on a property business there can be no question of mutual trading, because mutuality is exclusively a trading concept. Section 260 of the Corporation Tax Act 2009 confirms that the mutual business rules do not apply to property businesses, and receipts and expenses are brought into account even where a relationship of mutuality exists. So ground rent paid by leaseholder members to their own freehold company is taxable.

Even where a company does trade mutually, BIM24005 says the relief covers only transactions with members. Income from non members and other income remains taxable.

Which receipts are taxable in the company?

  • Ground rents. TSEM5755 says rents receivable by flat management companies, other than peppercorn rents, are outside section 42 and remain chargeable as property income.
  • Licence fees and other rents. Payments for telecoms equipment on the roof or advertising hoardings come from exploiting the company’s interest in the building.
  • Interest on the company’s own money, as opposed to trust money.
  • Lease extension premiums. A share of freehold company that grants an extended lease is making a part disposal of its freehold, taxed as a chargeable gain. See lease extension costs.

GOV.UK currently gives a small profits rate of 19% for profits of £50,000 or less and a main rate of 25% above £250,000, with marginal relief between. The thresholds are divided by the number of associated companies and reduced for short periods; see marginal relief.

When will HMRC treat the company as dormant?

GOV.UK says a flat management company must send a Company Tax Return no later than 12 months after the end of its first financial year. HMRC may then treat it as dormant and stop expecting returns, but only if the company does none of the following:

  • allow directors who are not residents or leaseholders under its articles;
  • do more than manage the property in the interests of shareholders;
  • make a profit;
  • need to pay more than £100 in corporation tax in a year;
  • get any income from the property it manages, such as rent;
  • pay dividends or other distributions to shareholders;
  • own assets likely to give rise to a chargeable gain on disposal;
  • make payments that need to be taxed.

HMRC writes to confirm dormancy. Without that letter, or once the company starts doing anything on the list, it must file every year. A share of freehold company with ground rents, or one that will receive extension premiums, will usually fail the test. The Company Tax Return deadline is 12 months after the end of the accounting period, and the tax is usually due nine months and one day after it.

What must be filed at Companies House?

Dormancy for corporation tax does not end the company law duties. GOV.UK says the company must send Companies House its annual accounts, a confirmation statement and details of changes such as directors joining or leaving. Under section 442 of the Companies Act 2006, a private company’s accounts are due nine months after the end of its accounting reference period. The volunteer residents who agree to be directors take on the full legal responsibilities of directors.

Dormancy for Companies House is a separate test. Section 1169 of the Companies Act 2006 treats a company as dormant only while it has no significant accounting transaction, meaning one that must be entered in its accounting records. A company that pays its own bills, receives ground rent or charges members for anything is not dormant on this test, whatever HMRC has said about corporation tax. See dormant company accounts.

How should service charge money appear in the company’s accounts?

TECH 03/11 says trust money does not belong to the RMC or RTM company and should not be included as an asset in its statutory accounts. It acknowledges that whether service charge transactions should pass through the company’s profit and loss account is debated; if they are included, the account should reflect the economic substance. The service charge accounts for the leaseholders, prepared under the leases, are separate from the statutory accounts. Directors should agree one consistent approach with their accountant and explain it in the notes.

What does this look like in numbers?

Illustration only. Harbour View Freehold Ltd owns the freehold of eight flats. In its year to 31 March 2027 it collects £40,000 of variable service charges, receives ground rents of £400, a roof licence fee of £3,000 and spends £600 on its own company secretarial costs.

  • Service charges: trust money under section 42, excluded from the corporation tax computation.
  • Taxable property income: £400 + £3,000 minus £600 = £2,800. Mutuality does not help with the ground rent.
  • Corporation tax at the small profits rate: £2,800 x 19% = £532.
  • Interest on the sinking fund goes on a trust return, not the company return.

Because the company has rental income and tax to pay, it cannot be treated as dormant and must file a return every year.

What are the common mistakes?

  • Assuming mutual trading covers ground rents paid by members.
  • Treating HMRC dormancy as permission to stop filing accounts at Companies House.
  • Including sinking fund balances as company assets or its interest in the corporation tax return.
  • Forgetting that a lease extension premium creates a chargeable gain in a share of freehold company.
  • Not telling HMRC when a previously dormant company starts receiving income.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.