Important new guidance on accounting and reporting in relation to residential service charge accounts has just been released and is set to affect thousands of blocks of flats across the country. Nick Bullen explains what it all means.
Without doubt, awareness of the need for better service charge accounting is required in order to improve standards and promote best practice among those responsible for collecting, and accounting for, service charge monies, whether they are professional property managers or Residents Management Companies (including Right to Manage Companies (RTMCos)).
New guidance, published in October, relates to residential leasehold property on which variable service charges are paid by flat owners to cover the cost of providing services, repairs, maintenance, improvements, insurance or management. The best practice recommendations have been put together by ARMA together with the Association of Chartered Certified Accountants (ACCA), the Institute of Chartered Accountants of England and Wales (ICAEW) and the Royal Institution of Chartered Surveyors (RICS).
So what impact will the new guidance have on flat owners and what do those managing or self-managing property need to take on board? Key messages included in the guidance are that:
- All tenants paying variable service charges should receive an annual service charge statement from their landlord, RMC or RTMCo within six months of the end of the accounting year. This ensures that all tenants are provided with full details of service charge costs in a timely manner, following the service charge period.
- It is recommended that the annual statement should include an income and expenditure account and a balance sheet and be prepared on an accruals basis. The guidance includes an example of a service charge statement. This helps to ensure that all tenants have a full understanding of the financial information relating to the service charges, including the financial position at the end of the accounting period.
- Where relevant costs can be recovered in the service charges, all annual statements of account should be subject to an examination by an independent accountant before issue to flat owners. While appointing an accountant will incur additional costs, it provides assurance to the tenants that the service charge annual statement has been subject to independent scrutiny.
- If the service charge statement is prepared on behalf of an RMC or RTMCo then it should be a separate statement to the annual accounts for the company which need to be filed at Companies House.
This last point is an important one. Many RMCs and RTMCos still continue to include, incorrectly, service charge transactions in their accounts. This may mean that corporation tax liabilities – if any – are wrongly calculated. Where this is the case, those responsible for self-managing properties are neglecting to follow the statutory trust concept relating to service charge transactions. The issue as to whether service charge transactions should be included in the landlord’s own accounts has been referred to the ‘Urgent Issues Task Force’. Should they decide in favour of inclusion, no additional guidance is expected until 2012.
At present, Companies House appears to take a softly softly approach to the filing of RMCs and RTMCos statutory accounts in terms of appropriate disclosures and the content of accounts. If the position changes following the release of this latest guidance, then the imposition of potential significant late filing penalties may occur if Companies House rejects filed accounts close to the filing deadline. Such penalties, and the cost of re-working the accounts, may fail to be recoverable from the tenants. This may be in addition to any costs, which are not recoverable from tenants where more than 18 months has elapsed since the cost was incurred. To avoid finding themselves in this situation, RMCs and RTMCos should ensure that they provide residents with service charge accounts within six months to meet their obligations and take specialist advice where necessary.
New guidance at a glance
Follow these simple steps to get the most from the new best practice guidance
- Ensure that arrangements are in place to ensure that the Service Charge Accounts can be produced and circulated within 6 months of the end of the accounting period.
- Review the clauses in the lease regarding the obligations to prepare and circulate the Service Charge Accounts and the requirement to have an ‘audit’ carried out.
- Ensure the tenants, Residents Association, landlord and managing agents fully consider and discuss, the wishes and needs of the tenants regarding the need for a statutory audit or merely an independent accountant’s review of the Service Charge Accounts, with regard to any additional cost.
- Ensure that RMCs and RTMCo’s statutory accounts exclude the Service Charge Accounts and trust bank account
- Talk to your accountants, ensuring that they are fully conversant with the new guidance on Service Charge Accounts
Nick Bullen is a Partner at Whitley Stimpson and a specialist in Service Charge Accounting
Accounting for service charges in the property industry is a specialised area that requires expertise and an understanding of the sector. Whitley Stimpson is able to provide expert advice on all aspects of service charge accounting as well as content and format of statutory accounts for RMCs and RTMCos. Whitley Stimpson are Registered Auditors, thus enabling the firm to act as auditors or Independent Accountants in respect of service charge and statutory accounts matters.
