When a property is divided into individually owned and inhabited units, service charge accounts are necessary. This is because the building will have to pay shared expenses, and an account of exactly how much is being charged ensures the process remains transparent to all occupants.
Either the tenants or leaseholders will be issued with a service charge, which is essentially a payment they must make towards the upkeep of the wider premises.
Put another way, service charges are accumulated costs associated with providing communal or shared services – such as repairs – to a building.
The landlord or building management will typically issue this statement of charges annually. They are also allowed to make an interim charge based on expected expenditures in most leases.
What is a service charge for a property?
A service charge for a property is a payment that a landlord or leaseholder is required to make toward the expense of services and repairs to the larger premises whereupon their property is located.
The lease will often outline the expenditures that can be recovered, how service charges should be accounted for, and how long the accounts should cover.
The lease will also specify the frequency of payments, which are often made in advance.
What are service charge accounts?
Service charge accounts have to be prepared for both residential properties and commercial properties. Our tax experts can help with this.
Compared to the residential sector, the criteria for commercial service charge accounts are much less stringent since there is no statutory guidance that covers commercial service charge accounting.
However, the parameters of cost sharing and how leaseholders should be informed of such expenses should still be outlined in the lease.
In a commercial property lease, service fees are often paid by the tenant to the landlord. When a property is a part of a larger complex and there are joint facilities or spaces, this is not uncommon.
Where can I find these details?
Your lease should contain information on how your service charges are set up and what you’ll be responsible for paying.
This can include details such as the expenditures that may be recovered and the period that the accounts should cover.
How is a service charge calculated?
When calculating service charges, the landlord must abide by the conditions of the lease. The leaseholders of a property will generally divide the service charge costs.
Since it has become customary to collect service charges in advance of each accounting period, estimates of expenses are typically estimates for the coming year.
Although the leaseholder or renter might occasionally see these charges as unreasonable, they are intended to avoid hefty, unforeseen costs in the event that extensive repairs are required.
The service charge can rely on various factors, but the main factors affecting the overall service charge include day-to-day costs, cyclical expenses, and reserve funds (sinking funds).
Day-to-day costs can cover insurance costs and staff wages. Cyclical expenses are less frequent but still regular costs, such as cyclical maintenance, grounds maintenance, drainage maintenance and alarm maintenance fees.
Reserve funds are the funds reserved for larger and costlier repairs or costs the property may face.
Do service charge accounts have to be audited?
Simply put, yes. Landlords have many obligations, including providing an annual statement of service charge expenditure to their tenants.
But before the tenant is issued with the service charge account, it must be audited and verified by an independent accountant.
The obligation to provide such a statement is imposed within most tenancy agreements, which are legally binding contracts within the property industry, meaning a competent audit is essential before the statement is received by the tenant to minimise hassle.
The main reason for this is to ensure that landlords are able to justify their charges and that both parties are sufficiently protected. In other words, a competent audit ensures fairness on both sides.
Therefore, whatever the conditions of the tenancy agreement may be, it is vital that the auditing accountants chosen are experienced, proficient, and dedicated in service charge matters.
That’s why our highly experienced and qualified accountants here at Williamson & Croft are here to help with our flexible auditing service. No matter the terms of your lease agreement, we have you covered.
The difference between service charge and company accounts explained
The law is a complex thing and with experience in service charge and company accounts, we recognise that understanding the difference between them can sometimes cause great confusion due to their similar appearance.
However, the distinction between the two simply lies within the wording of the statutory laws in which they comply with.
Listed below are the main differences between the two statutes, so that you can construct a set of accounts that correctly conforms to the letter of the law.
Firstly, service charge accounts comply with the obligations presented under Sections 21 and 21A of the Landlord and Tenant Act 1985:
Section 21: Summary of the service charge costs. Leaseholders have the right to request a summary of service charge expenditures.
Section 21A: If section 21 is breached, the tenant might withhold the payment of the service charge.
Section 152 of the Commonhold and Leasehold Reform Act 2002 expanded on this further:
Section 152: Amendments to Landlord and Tenant Act 1985 Section 21 and 21A requiring leaseholders to be given:
- Annual income and expenditure accounts/statements.
- Balance sheet/balancing statements.
- provided within six months of year-end.
- accompanied by a qualified accountant report.
When it comes to company accounts, in cases where a residents management company (or an RTM, RTE Company) creates the accounts, then the provisions of the Companies Act 2006 must be fulfilled in addition to the above relating to service charge accounts.
A company must file accounts every year, and this must include the following:
- a profit and loss account
- a balance sheet
- a director’s report
Accounting for service charges and service charge accounts
Accounting for service charges and service charge accounts is a specialist field that demands thorough knowledge and understanding.
As service charge accounts can be a complex area of property management, seeking a qualified accountant is advisable.
An accountant can also help with comprehensive project management and the costs of management.
In other words, when it comes to choosing an independent accountant to audit your service charge accounts, you simply cannot settle for average, and you need the best in the business. That’s where we come in.
Our accounting experts here at Williamson & Croft go above and beyond to ensure that everything is followed to the letter and that everything for you is as hassle-free as possible so that you’ll never have to worry again and can spend more time on your business, without having to fret over the fine details.
As something that is often overlooked and not correctly understood, the importance of adhering to the legal requirements in this area of contract law cannot be understated, as it provides protection for both the landlord and tenant. Crucially, service charge accounts are not something that can be efficiently managed without expert knowledge.
By hiring our specialised accountants, you can guarantee that your business can effectively comply with regulations, reduce risk, manage growth, provide satisfaction for both you and your tenants, and save money.
As the best in the business, our accountants possess the skill set that enables them to stay on top of the game. With us, you can guarantee that you can negate any risk of leaseholders taking legal action against you due to our comprehensive service charge accounts audits.
There is no doubt that a qualified independent accountant can help you add value to your business in a variety of ways. That’s why at Williamson & Croft, we are dedicated to helping you in ensuring things run as smoothly as possible.
Enhance your enterprise by hiring our highly skilled, independent accountants who can help your business thrive, grow fast, avoid unnecessary legal action, and sustain itself. As the best in the industry, nobody does it quite like us.
Why Williamson & Croft?
Between constant legislative changes and ever-changing market conditions, we understand the volatility of the property sector and the challenges that arise within it. We’ve worked in the industry long enough to know the financial and tax challenges that property businesses face every day, from funding through to complex tax legislation.
Regardless of whether you’re a developer, investor or landlord you need an accountancy firm that can navigate the ins and outs of the industry while providing advice that ensures your business comes out on top. One that wants to immerse themselves in your business so that they can provide you with the best service level possible. At Williamson & Croft, we don’t think that this is too much to ask for, so that’s exactly what we provide.
Contact us today for more information about service charge accounts and how we can help.