When a single building is divided into individually owned units, it is likely that there will be shared costs in relation to the upkeep and maintenance of the building, which would be borne by the respective leaseholders in accordance with their lease.
It is usual for a managing agent, on behalf of the Freeholder, to be responsible for the issue and collection of the service charges payable by the leaseholders. The managing agent will ensure that the property is suitably maintained ensuring costs incurred in the upkeep of the property are recorded and paid on a timely basis.
Whether the freeholder is a third party or a collective of the leaseholders, possibly in the form of a Resident Management Company (RMC), it is necessary for annual service accounts to be prepared and distributed amongst the leaseholders to provide transparency in respect of where their service charges have been spent.
Usually, service charges are collected in advance of each accounting period, based on estimations of expenses and budgets for the coming year.
- Any surplus in each year is known as a reserve fund for which the management company will build up towards large works or extensive repairs
- If there is a deficit in funds, this can lead to additional interim service charge demands to cover costs, the technicalities for this are usually detailed in the lease
Leases often outline the expenditure that can be recovered, how service charges should be accounted for, and the period in which the accounts should cover.
Service charge accounts are prepared for both residential and commercial property
These accounts should be independently examined and verified by an accountant, which is where Abbey Stevens can help!
How can Abbey Stevens help?
- Initial preparation of service charge accounts from the source documents provided by your managing agent
- Independent examination of service charge accounts and expenditure, so they are verified before distribution to the directors
- Company secretarial duties (For resident management companies, this often consists of updates such as appointing / terminating directors and transferring shares when properties change hands)
- Dormant statutory filings (for more details, please see our technical details below)
- As tax advisors we can also offer advice to freeholders and leaseholders on the implications of property disposal
Technical details:
Interestingly, the company’s statutory accounts look very different to the service charge accounts…
Resident Management Companies adhere to a number of legal regulations and compliance requirements.
Under the guidance issued by RICS, ARMA, ACCA, ICAEW and ICAS the funds relating to service charges in the RMC / RTMCo’s statutory accounts are subject to trust (held on behalf of, but not belonging to).
Service charge transactions therefore should not be accounted for in the company’s statutory accounts. Often resulting in the limited company having no true transactions of it’s own, thus the company would usually file dormant accounts at Companies House.
If you’re interested in reading the technical guidance issued, it can be found here:
ACCA