Are you a landlord or property manager who wants to ensure accurate and compliant service charge accounts? While it may be tempting to handle the accounting yourself, there are many pitfalls that could lead to mistakes.
It is a crucial component of property investment, particularly in multi-occupancy buildings such as apartments, offices, and retail units. As a property investor/landlord in UK, it’s important to understand the essential information about service charge accounts to ensure that you’re making informed decisions.
What is a Service Charge?
A service charge is a payment made by a tenant or leaseholder to cover the costs of services and repairs to the common areas or shared facilities of a building or property.
This charge is typically associated with multi-occupancy buildings such as apartment complexes, office blocks, and retail units, and it's an essential part of property management in UK.
The service charge usually includes the cost of services such as general repairs and maintenance, cleaning of common areas, and electricity bills for communal areas.
For example,
If a resident lives in an apartment complex with a shared gym, the cost of maintaining the gym is covered by the service charge that all residents contribute to.
What are Service Charge Accounts?
Service charge accounts are detailed statements that provide a breakdown of the income and expenditure related to the provision of services to tenants or occupiers of a property. They are prepared annually and include information on the costs associated with providing services such as cleaning, maintenance, repairs, etc.
These accounts ensure that the costs associated with providing services are shared fairly among the tenants or occupiers.
It is used to determine the amount of service charge payable by each tenant or occupier and are usually reviewed and audited by an independent accountant or surveyor.
Basis for Preparation of Service Charge Accounts
While there is no established accounting framework for the service charge statement, Section 21(5) of the Landlord and Tenant Act 1985 outlines the requirements for a summary of costs to be prepared upon request by a lessee under s21(1).
While there is no requirement for accruals based accounting or a balance sheet in the preparation of service charge statements, it is generally accepted best practice to prepare them on an accruals basis and include a balance sheet to provide a complete picture of the financial position of the service charge fund.
Note: Seeking advice from qualified professionals can help ensure accuracy and compliance.
Information to be Included in the Service Charge Accounts
The information that should be included in a service charge accounts can vary depending on the specific property and the terms of the lease or tenancy agreement.
As mentioned above, there are no strict rules for preparing the service charge accounts. However, the following can be included for producing a better service charge account.
- Income and expenditure accounts providing a detailed breakdown of all income received and expenditures incurred in relation to the service charge.
- Balance sheet for the service charge fund.
- Details of the costs incurred in the accounting period in relation to the property in accordance with the property lease.
- Notes to explain the figures, for example any movements on reserves representing costs not included in the income and expenditure account.
- Comparative figures are not required in service charge accounts, but can be useful to include for understanding cost trends over time.
- Any certificates, statements and signatures by or on behalf of the accountant, landlord or agent that are required by the lease.
The above list is not exhaustive, and the specific information required will depend on the individual property and the terms of the lease or tenancy agreement.
Do service charge accounts need to be audited?
There is no legal requirement for service charge accounts to be audited. However, it is recommended that service charge accounts be independently reviewed or audited by a qualified accountant to ensure accuracy and compliance with relevant regulations.
This can provide assurance to both landlords and tenants that the charges and accounting are fair and transparent. Additionally, some leases may require the accounts to be audited.
Summary
With tenants and leaseholders having the right to fair charges, it's essential to have professional guidance to avoid excessive charges and disputes.
Let us help you navigate the complexities of service charge accounting and ensure that your financial reporting is accurate, reliable, and compliant with relevant regulations.
