Service Charge Accounts vs Companies House Accounts: Why Your Freehold or RTM Company Might Be Dormant

When managing a block of flats, directors of Right to Manage (RTM) and resident-owned freehold companies are often surprised to find they must keep two entirely separate sets of financial records. Service charge accounts track the running costs of the building. Companies House accounts report only on the legal entity itself. The two are easy to conflate, and that is where most filing mix-ups begin.

1. Service charge accounts: the building’s finances

These sit in landlord and tenant law — principally the Landlord and Tenant Act 1985 (including the right to a summary of relevant costs under section 21) and the Landlord and Tenant Act 1987 — together with whatever the leases require.¹ Most leases also oblige the landlord or management company to produce annual service charge accounts. Professional codes and guidance (the RICS Service Charge Residential Management Code and ICAEW/ARMA Technical Release TECH 03/11) set the expected standard.

• What they cover: the operational costs of the block — building insurance, communal electricity, cleaning, repairs, reserve/sinking fund contributions, and managing agent fees.
• Who receives them: service-charge-paying leaseholders, usually because the lease requires annual accounts and, in any event, because leaseholders can request a written summary under section 21 of the 1985 Act. The summary is due within six months of the end of the accounting period or one month of the request, whichever is later.
• Certification: where the service charges are payable by more than four dwellings, that summary must be certified by a qualified accountant as a fair summary, sufficiently supported by accounts, receipts and other documents.² The accountant must be independent of the landlord — an officer or employee of the company cannot certify it, so a director cannot sign off their own block’s summary.
• Who owns the money: under section 42 of the Landlord and Tenant Act 1987, variable residential service charges paid by the tenants of two or more dwellings (and the investments representing them) are trust monies.³ They do not belong to the RTM or freehold company. They must be held to meet the costs for which they were collected and, subject to that, for the contributing leaseholders. Best practice — and the professional codes — is to hold them in a designated client or trust account rather than treating them as company cash.⁴

Service charge money held on that trust is generally not company turnover and not taxable profit of the company. It should not appear as income on the company’s statutory accounts.

Interest earned on the service charge trust is trust income, not company income. Under current HMRC guidance, from 6 April 2024 a trust need not report or pay tax where its income from all sources is £500 or less in the tax year; above that, a trust return may be required and the whole amount is in scope, not just the excess. Either way, that is the trust’s tax position and separate from the company’s Corporation Tax.

One change to keep an eye on: the Leasehold and Freehold Reform Act 2024 provides for a standardised annual report and service charge demand to replace parts of this regime, but those provisions need secondary legislation before they take effect.

2. Companies House accounts: the legal entity’s finances

These sit in the Companies Act 2006. Every UK limited company must prepare statutory accounts and file them at Companies House, and must also file an annual confirmation statement, whether or not it is trading. Directors now have to verify their identity with Companies House as well — we cover that separately in Companies House Director Personal Code.

• What they cover: only money and assets that belong to the company itself. Typical examples are ground rent the company is beneficially entitled to, lease-extension premiums paid to the company as landlord, other commercial receipts (parking, masts, retained commission), and any expenses met from company funds rather than the service charge trust.
• Who receives them: they are filed on the public register and given to the company’s members.

Companies House filing fees, late-filing penalties and the original subscriber share money do not themselves make a company “active”.⁵ Other company-level payments can. In practice many leases allow company administration costs (accountancy, directors’ and officers’ insurance) to be met from the service charge. Where that is done, those costs never hit the company’s own books.

Why so many RTM and freehold companies file as dormant

“Dormant” means two different things.

Companies House treats a company as dormant if it has had no significant accounting transactions in the financial year.⁶ The only usual exceptions are Companies House fees, late-filing penalties, and money paid for shares on incorporation.

HMRC treats a company as dormant for Corporation Tax if it is not trading and has no income or gains. You normally need to tell HMRC, and you must still file a Company Tax Return if a notice to file is in force.

The two tests can diverge, so a company can be dormant for one body and not the other.

Because service charge monies are trust funds rather than company income, a typical RTM company — and many resident management companies — carries on little or no commercial activity in its own right. An RTM company must be a private company limited by guarantee, does not acquire the freehold, and has no right to collect ground rent; ground rent remains the landlord’s.⁷ Once trust money is excluded, there is often nothing left that belongs to the company, so it files short dormant accounts showing little more than its constitution.

None of that is unusual, and there is nothing irregular about a block whose company genuinely has nothing to report. It does mean the filings themselves still have to be made: dormant accounts and a confirmation statement every year.

One point that catches people out: audit exemption is not the same as not needing an accountant. A dormant or small company is normally exempt from audit, but where more than four dwellings contribute, the section 21 service charge summary still has to be certified by a qualified accountant. The company being dormant does not remove that.

When the company is not dormant

It is tempting to assume the answer turns on whether every leaseholder joined the freehold purchase. Usually it doesn’t. What matters is whether the company beneficially received income, or had accounting transactions of its own, in the year being filed.

The company will generally fall outside dormancy — and into Corporation Tax — if, during the year, it:

• received ground rent it was beneficially entitled to (including ground rent from participating members, unless the leases have been varied to a peppercorn);
• received a premium for a lease extension, variation or grant as landlord (taxed as income or as a chargeable gain depending on the term granted);
• received other commercial income (garages, aerials, retained commission);
• earned interest on the company’s own funds — as distinct from interest on service charge money, which stays trust income even where the account is in the company’s name;
• bought the freehold during the year, since the purchase is itself a significant accounting transaction; or
• paid company expenses from company funds.

A freehold company with non-participating leaseholders often falls into this category, because it is the landlord of those flats and may collect ground rent or later grant lease extensions. But full participation does not automatically make the company dormant either — plenty of fully resident-owned freehold companies still collect ground rent and have to account for it.

Conversely, simply holding the freehold title from one year to the next does not break Companies House dormancy on its own. Dormancy is about transactions in the year, not about whether a valuable reversion exists. Where the company owns that reversion beneficially, the accounts should reflect the company’s own assets and income. Some companies hold the freehold only as nominee or trustee for participating leaseholders; that structure can keep company activity at nil, but it is a legal and tax design choice, and worth confirming from the title and the purchase documents rather than assuming it from the fact of collective enfranchisement.

And if an RTM company or RMC merely collects ground rent as agent for a third-party freeholder and passes it on, that is an in-and-out item rather than the company’s income — provided it is documented that way.

Key action for directors

Before filing dormant accounts, it is worth looking at the year that is about to be filed, rather than at the original purchase story:

1. Did the company itself receive ground rent, extension premiums, or any other non-trust income?
2. Is the freehold held beneficially by the company, or expressly as nominee for the participating leaseholders?
3. Did the company have transactions of its own — bank charges, professional fees, insurance, or interest on its own funds — as opposed to movements on the service charge trust account?
4. Has HMRC issued a notice to file a Company Tax Return?
5. Did the service charge trust earn interest above the current reporting threshold?

RTM companies are usually non-trading. A freehold company’s position depends on what the company actually owns and receives, not simply on whether every leaseholder originally participated. If the answer to any of the first three is yes, dormant accounts are unlikely to be the right filing, and the company will normally need accounts showing its own activity, together with a look at its Corporation Tax position.

This article is general information, not advice on a particular company. Before the next Companies House deadline, it is worth having the leases, title, bank mandates and last year’s filings reviewed together.

Bibliography

Primary legislation

• Landlord and Tenant Act 1985, c. 70.
• Landlord and Tenant Act 1987, c. 31.
• Commonhold and Leasehold Reform Act 2002, c. 15.
• Companies Act 2006, c. 46.
• Leasehold and Freehold Reform Act 2024, c. 22.

Further reading

• HM Revenue & Customs, Dormant companies and associations. Available at: gov.uk
• Companies House, Dormant accounts. Available at: gov.uk
• ICAEW / ARMA / RICS, Technical Release TECH 03/11: Residential service charge accounts. Available at: icaew.com
• The Leasehold Advisory Service (LEASE), Service charges and other issues. Available at: lease-advice.org

Footnotes

1. Landlord and Tenant Act 1985, s. 21 gives a tenant the right to require a written summary of relevant costs. Section 152 of the Commonhold and Leasehold Reform Act 2002 would have replaced it with a duty to provide regular statements of account, but that section has never been brought into force, so the original s. 21 still applies. ↩

2. Landlord and Tenant Act 1985, s. 21(6) requires certification where the service charges are payable by more than four dwellings; “qualified accountant” is defined in s. 28, which also disqualifies an officer, employee or partner of the landlord. ↩

3. Landlord and Tenant Act 1987, s. 42 applies to variable service charges paid by the tenants of two or more dwellings and holds the sums on trust to meet the relevant costs and, subject to that, for the contributing tenants. ↩

4. Section 42A of the Landlord and Tenant Act 1987, inserted by the Commonhold and Leasehold Reform Act 2002, would require service charge money to be held in a designated account. It has not been brought into force, so the designated-account requirement is currently a matter of professional practice and lease terms rather than statute. ↩

5. Companies Act 2006, s. 1169(3) excludes from “significant accounting transaction” any sum paid for shares taken by a subscriber to the memorandum, fees paid to the registrar on a change of name, re-registration or confirmation statement, and late-filing penalties. ↩

6. Companies Act 2006, s. 1169(1)–(2): a company is dormant during any period in which it has no significant accounting transaction, meaning one that must be entered in the company’s accounting records under s. 386. ↩

7. Commonhold and Leasehold Reform Act 2002, s. 73 requires an RTM company to be a private company limited by guarantee with prescribed articles. The right to manage transfers management functions only; it does not transfer the freehold or the right to ground rent. ↩