A service charge account is specifically used in the property management industry. Such accounts are used by landlords, property management companies or property investment companies to collect service charges from tenants, lessees or leaseholders. These service charges can be variable, which means they change from term to term, or fixed and are usually agreed upon in advance with tenants. These service charges can include a range of fees, which will cover maintenance costs, such as communal areas (a pool, garden, gym, parking garage etc.), elevators, maintenance of the building façade, security guards, lighting and more.
Service charge accounts and service charges by property management companies in the UK are covered under the Landlord and Tenant Act (LTA). This act protects tenants against ‘unreasonable’ service charge fees levied upon by landlords and the landlord is legally required to provide details of the fees to tenants. Tenants should also be aware that they have the legal right to receive a ‘summary of costs’ from their landlord and this must be provided to them voluntarily.
What is important from an accounting point of view is that these service fees are held in trust for the tenants and are not considered to be assets of the property management companies. Therefore, these monies cannot be included in the statutory accounts of the company. It is important to manage these accounts properly and in a transparent manner, to not only avoid legal problems, but also to meet financial requirements imposed upon by the HMRC. In fact, many management companies fall prey to preparing their accounts incorrectly and this pitfall can be avoided by seeking professional advice.
Tenants should take a look at the Service Charge Residential Management Code, which is published by the Royal Institution of Chartered Surveyors. This code outlines how service charges are levied and what the trust arrangements should contain. Generally, landlords are required to prepare annual financial statements, under the Companies Act, also known as service charge statement of accounts. Tenants should have access to these financial statements as well, in most cases, such accounts should be made available within six months of the end of the financial year.
As regulations change it is important for landlords and management companies to remain compliant to any changes. Landlords specifically need to be aware of any changes in the LTA or Commonhold and Leasehold Reform Act. To best understand these changes and implications of these changes, it is important get the appropriate financial advice. Many accounting firms specialise in advising landlords and management companies on how to best manage service charge accounts.
Contact our specialist property and construction team to discuss any issues you may have regarding service charge accounts.
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