Why do we have to prepare separate service charge accounts and statutory accounts?

Why do we have to prepare separate service charge accounts and statutory accounts?
One of the more common questions that directors ask is why is it necessary to prepare separate service charge accounts and statutory company accounts? Often directors are resistant to this idea as they feel it results in additional accountancy fees and it also requires them to explain to lessees why they are presenting two sets of accounts at the AGM. On the face of it would be far easier for directors to prepare just one set of accounts that could be used to present the service charge expenditure to lessees and also to meet the Company’s filing obligations at Companies House. However, this approach is not advisable.

Accounting guidance
For reporting accountants the only guidance on this matter is to be found in the technical guidance note for preparing service charge accounts, TECH03/11. This states that Residents’ Management Companies (RMCs) should prepare separate service charge accounts and statutory accounts. However, it doesn’t expand on this guidance any further and in particular it doesn’t address if RMCs should include service charge transactions in their accounts along with company transactions.

The requirement to prepare separate statutory accounts and service charge accounts has now been reinforced by communications from ARMA to its members and also in the 3rd RICS Residential Management Code.

There are many good reasons for this requirement. Some of these include,

  • The form and content of service charge accounts must follow the requirements of the lease. These requirements may not always be compatible with statutory filing requirements for Companies House which can be quite rigid and serve a completely different purpose to reporting on service charge expenditure.
  • Statutory accounts include transactions and items that would not normally appear in service charge accounts such as share capital, depreciation and tax on profits.
  • There may be company expenditure that is not permitted to be recoverable as part of the service charge. Common examples of this type of expenditure include statutory filing fees and Directors’ and Officers’ insurance. The legal case of Wilson v Lesley Place (RTM) Company Limited [2010] UKUT 342 (LC) highlights the importance of this distinction. This case ruled that the administrative costs of running an RTM company could not be recovered through the service charge. The lease only permitted the administrative costs of managing the property to be recovered through the lease.
  • There is an increased probability that an FTT will reject statutory accounts on the grounds that they do not comply with the requirements of the lease to the property.
  • Mixing company income (e.g. ground rents) with service charge income is confusing and results in a loss of transparency of the service charge accounts.

These reasons outweigh the argument that it costs more to prepare two sets of accounts.

How valid is the cost argument?
How valid is the cost argument against preparing separate service charge and statutory accounts? For most RMC companies it should be possible to file dormant statutory accounts at Companies House. In this instance the costs to file the statutory accounts should be nominal and the additional cost should not really be a burden on the company.

There will be a cost issue if the company has always filed full statutory accounts and is transitioning into preparing dormant accounts. In the year of transition there will be a number of accounting adjustments that will be required and it is best in these cases to use experienced service charge accountants to assist. However, after the first year the cost savings in future years will offset the additional costs in year one.

For companies with more complex transactions, such as ground rents received and other income arising in the year, then separate statutory accounts should still be prepared. The cost savings from only preparing statutory accounts will be outweighed in the end by the numerous adjustments required to strip out company transactions from service charge transactions. There could be a number of reasons for this but perhaps the most pressing will be to prepare the tax liability for the company.

Conclusion
At Haines Watts we will always encourage directors to prepare separate service charge accounts and statutory accounts. Depending on the circumstances of the Company there are still a number of options open to directors and directors must ensure that they comply with the statutory requirements for filing accounts with Companies House. However, RMC directors should never forget that the service charge accounts must always follow the form and content that is laid down in the lease.

Haines Watts is a top twelve National firm of accountants with a dedicated team of accountants specialising in the audit and certification of service charge accounts. For more information about the team and the services they provide, please visit their website at hw-servicecharge.com.

Gordon Whelan is National Head of Service Charge Accounting at Haines Watts. Gordon has specialised in service charge accounting since 2006 and is an Honorary Consultant to The Federation of Private Residents’ Associations (FPRA)