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Service Charge Accounts

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We are accountants and auditors specialist in the provision of service charge accounts for landlords, property owners and tenants.

Service charge accounts are financial statements that detail the income and expenditure related to the management and maintenance of a property or properties within a development. They are typically used in multi-occupancy buildings such as apartment complexes, office buildings, or shopping centres where the costs of maintaining common areas and providing services are shared among the tenants or property owners.

Service charge accounts typically include:

  • Income: Contributions from tenants or property owners, interest earned on reserve funds, and any other income related to the property.
  • Expenditure: Costs incurred for property maintenance, repairs, insurance, utilities, management fees, and other services provided to the property.
  • Reserve Funds: Amounts set aside for future major repairs or unexpected expenses.
  • Balances: Opening and closing balances of the service charge fund.

Service charge accounts are used for:

  • Providing transparency: Tenants or property owners have the right to know how their service charges are being spent.
  • Budgeting: Helps in planning future expenditure and setting service charge levels.
  • Legal compliance: Ensures compliance with legal requirements and lease agreements.
  • Dispute resolution: Provides a basis for resolving disputes related to service charges.

Service charge accounts are typically produced annually, although the frequency may vary depending on legal requirements and the terms of lease agreements.

Service charge accounts need to be produced for:

  • Tenants or property owners: To provide them with information on how their service charges are being utilised.
  • Property managers: To ensure proper management of the service charge fund.
  • Regulators and auditors: To ensure compliance with legal and regulatory requirements.

Do service charge accounts need to be certified or audited?

Service charge accounts may need to be certified by an external and qualified accountant. Certification provides assurance to stakeholders that the accounts have been prepared in accordance with relevant accounting standards and regulations.

Whether service charge accounts need to be audited depends on various factors including legal requirements, and the terms of lease agreements. In many cases, service charge accounts do require auditing to provide assurance to tenants and property owners about the accuracy and reliability of the financial information.

If a S21 Statement, set out by the Landlord & Tenant Act 1985, is required by a lessee or property owner then this needs to be completed by a qualified auditor.

Service Charge Accounts and the 6-month rule

The "6-month rule" in the context of service charge accounts typically refers to the requirement in the UK for landlords or property managers to provide service charge accounts to leaseholders within six months of the end of the accounting period. This rule is outlined in the Service Charges (Consultation Requirements) (England) Regulations 2003.

Failure to comply with the 6-month rule can have legal consequences, and leaseholders may have recourse to challenge the service charge if the accounts are not provided within the specified timeframe. Therefore, landlords and property managers should ensure timely preparation and distribution of service charge accounts to comply with this requirement and maintain good relationships with leaseholders.

Tax treatment of service charge accounts

Generally, the service charge demands are not subject to taxation and expenses are not deductible or allowable for tax.  Typically, the only taxable income is interest which is reported on a trust tax return, as all monies demanded and collected are held on trust for the lessees and are not funds of the landlord or property management company.

It is advisable to consult with a tax specialist to understand the tax implications of service charge accounts.  Advice may also be needed or beneficial when it comes to the treatment of leases.

The benefit of having a service charge specialist accountant

Whether you need a specialist service charge accountant depends on the complexity of the property management and accounting requirements. In cases where the property is part of a large development or involves complex lease agreements, a specialist service charge accountant with expertise in property management accounting certainly will be beneficial.

As service charge specialist accountants, we can assist in producing service charge accounts by:

  • Recording all income and expenditure related to the property or properties.
  • Allocating costs appropriately among the tenants or property owners based on their proportional usage or ownership.
  • Ensuring compliance with legal and regulatory requirements governing service charge accounting.
  • Preparing financial statements that accurately reflect the financial position and performance of the service charge fund.

Overall, the accounting treatment for service charge accounts aims to accurately record and report the financial transactions related to property management and maintenance, ensuring transparency, accountability, and compliance with legal and regulatory requirements.

Service charge accounts differ from a business's annual accounts in several ways:

Service charge accounts specifically detail income and expenditure related to property management and maintenance, whereas annual accounts provide a broader overview of a business's financial performance.

Service charge accounts are primarily intended for tenants, property owners, and property managers, whereas annual accounts are typically prepared for shareholders, investors, and creditors.

Service charge accounts may be subject to specific legal and regulatory requirements governing property management accounting, while annual accounts are governed by general accounting standards.

As the funds held are held on trust, they should be reported in seperate service charge accounts and not included in the landlord accounts, where the landlord is a company.  This is something that is often overlooked.

To find out more about our Service Charge Accounts service or to obtain a quote please email Alternatively, please complete the contact form below.

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