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H M Revenue & Customs

 

HM Revenue & Customs Website - August 2006

The following has been published on the HMRC website.

Clubs, unincorporated associations and property management companies:

Small tax liabilities

The nil starting rate of corporation tax has been removed. From 1 April 2006 all companies with taxable profits are liable to tax at a rate of at least 19% (Section 26, Finance Act 2006).

There is concern that many small clubs and societies which previously had no tax liability will now have to complete company tax returns, and pay corporation tax on very small amounts of income as a result of the abolition of the nil rate. Such income is often a negligible amount of bank interest.

This issue was discussed during the Finance Bill debate on 2nd May 2006. The Financial Secretary to the Treasury made the following statement:

"For many years, the Inland Revenue and, latterly, HMRC have not sought corporation tax returns from clubs and unincorporated associations with very small tax liabilities. That practice was established before the introduction of the starting rate of corporation tax, and it will not be affected by the changes in clause 26. Any club or society that is unclear about its tax position should ask its local HMRC office for advice".

HM Revenue & Customs (HMRC) is now putting the practice into the public domain to assist its customers.

In the following text 'club' means 'club and unincorporated association'.

Where

  • the annual corporation tax liability of a club is not expected to exceed £100, and
  • the club is run exclusively for the benefit of its own members, then HMRC will
  • prevent the issue of a notices to file returns and
  • treat the club as dormant, subject to review at least every 5 years.

To be within the scope of this practice the body must not be a

  • privately owned club run by its members as a commercial enterprise for personal profit
  • housing association or registered social landlord as designated in the Housing Act 1986
  • trade association
  • thrift fund
  • holiday club
  • friendly society
  • company which is a subsidiary of, or wholly owned by, a charity

and for each year of dormancy the body must have no

  • anticipated allowable trading losses
  • chargeable assets likely to be disposed of
  • anticipated payments from which tax is deductible and payable to HMRC

This practice is also extended to a property management company if it meets the following additional criteria:

  • the company's business consists of the management, on a non profit making basis, of a block(s) of flats or apartments for the owners, lessees or tenants of the flats or apartments
  • the company's articles of association contain rules to ensure only the persons having an interest in the property under management own the shares in the company
  • the company must not be entitled to receive any income from an interest in land
  • the company must pay no dividend or make any other distribution of profit.

However, where a property management company receives service charges which it is obliged to hold on trust for the tenants under Section 42 Landlord & Tenant Act 1987, the company will be liable to income tax on any interest arising on that fund. The company, in its capacity as trustee, will be within Income Tax Self Assessment and may be required to make a return to the relevant Trust Office. Income is chargeable at the special trust rates (40% for bank interest) except for the first £1,000 which remains chargeable at basic rates (20% for bank interest). Generally, where the income is below £1,000 and taxed at source, a return will not be required every year.

Most existing clubs and property management companies that meet the conditions are already likely to be treated as dormant by HMRC. Any body that makes a return every year but considers it meets the conditions for dormancy treatment, should contact the HMRC office responsible for its corporation tax liabilities.

A body which has received a letter from HMRC to say it is being treated as dormant need not contact HMRC until the end of the dormancy period, unless it breaches any of the conditions set out in the letter, or is subject to some other significant change affecting its tax position.

The IR46 leaflet relating to clubs, societies and voluntary associations is being discontinued. Updated guidance will be available shortly on our website.